An employer offers coverage under a self-insured major medical plan to all full-time employees.

In this situation, can it offer cash incentives to specified employees with a history of high claim costs to opt out of our plan and purchase individual policies instead?

Answer: No, for several reasons.

Health status discrimination

Firstly, according to guidance issued by the DOL, IRS, and HHS, offering a choice between cash and enrollment in the employer’s standard group health plan constitutes prohibited health status discrimination under health care reform and HIPAA if the offer is made only to employees with high claims risk.

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Although it may seem that you are treating the high-claims employees more favorably by giving them a choice between cash and coverage under your plan—especially now that health care reform guarantees availability of individual coverage without preexisting condition exclusions—the agencies do not view this choice as permitted discrimination in favor of individuals who have adverse health conditions.

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Rather, these employees have a greater effective cost of coverage because their cost includes the cash they will forgo if they elect to enroll in the employer’s plan.

In addition, the cash-or-coverage offer is considered to be an eligibility rule that discourages plan participation based on a health factor. Consequently, the arrangement is discriminatory, regardless of whether:

(1) the cash payment is pre-tax or after-tax to the employee

(2) the employer is involved in the selection or purchase of individual insurance policies, or

(3) the employee obtains any individual coverage.

Cafeteria plan rules

Secondly, choosing between cash and tax-favored health coverage requires a cafeteria plan election.

Imposing an additional cost (an employee must forego the cash incentive) to elect health coverage could result in prohibited discrimination under Internal Revenue Code § 125.

Conditioning financial incentives

Thirdly, an employer cannot condition availability of any financial incentive based on the employee’s actual purchase of an individual insurance policy.

Doing so creates an employer payment plan under Notice 2013-54 that violates health care reform’s prohibition on annual dollar limits as well as the requirement to provide coverage of preventive services.

Violating these provisions can result in $100 per day per employee excise taxes.

HIPAA violation

Lastly, the proposed incentive could violate HIPAA’s privacy rule if the employer is using Protected Health Information (PHI) (i.e., health or claims history) for a purpose unrelated to plan administration (i.e., to identify employees eligible for the cash incentive).

In addition, other federal laws, such as the Americans with Disabilities Act (ADA) could also be violated.

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Offering cash payment for employees with high health plan claims experience prohibited

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