Magic or Snake Oil?

Many of you are hearing from clients and colleagues about a new category of products in the marketplace that promise employers they can save money by offering their employees a skinny, preventive-care-only health plan coupled with a very rudimentary wellness program. 

Many of you are hearing from clients and colleagues about a new category of products in the marketplace that promise employers they can save money by offering their employees a skinny, preventive-care-only health plan coupled with a very rudimentary wellness program. The vendors assert that employers who sign up with them can avoid any exposure to the Affordable Care Act’s $2,000-per-employee penalty because their preventive-care-only plan satisfies the basic ACA Minimum Essential Coverage (MEC) requirements. Plus, employees who participate can still have the same amount of cash in their paychecks. It sounds like a lot of something for essentially nothing. Is it magic? Or is it snake oil? 

The vendors all claim they have legal opinions verifying the permissibility of their programs but, unfortunately, those are available only to those who have bought their service. I have more questions than opinions at this juncture, but the programs seem suspicious to me. Here are the basics on how these programs purport to work, followed by questions that seem to make these propositions more snake oil than magic.

The Promise

The three programs I reviewed have the same basic components:

1. The employee purchases a preventive-care-only plan with pre-tax dollars.
2. The pre-tax income subject to employment taxes therefore is reduced, saving the employer its share of those tax obligations (offset in part by a fee paid to the insurer for administering the program).
3. The “insurer” then repays the employee the entire amount of the plan premium, less an administrative fee, based on the employee’s participation in a wellness program.
4. The repayment is divided into two parts. Some goes into a “Benefit Bank” (they all have “Benefit Banks”) to be used to purchase voluntary benefit products from the vendor. The balance goes back to the employee in cash.

So, using the monthly example in the chart, here’s how this purportedly works. The employer would have a gross monthly savings (from avoided employment taxes) of $97.54 ($1,275 x 7.65%) or a net monthly savings of $64.59 after payment of the administrative fee, for an annual savings of $775.08 for this one employee. When you couple that with the avoidance of the Minimum Essential Coverage penalty then you consider the employee gets the same amount of take-home pay along with some new benefits, everyone should win. Does it sound too good to be true?

The Questions

Here are some questions that interested clients should be asking the promotors of these magical programs.

Why isn’t the non-benefit-bank component of the wellness reward subject to taxation?

My tax colleagues at Steptoe inform me that, under Treasury Regulation Section 1.132-6(c), wellness rewards paid in cash must be reported as W-2 wages and are fully subject to both income and employment taxes. A recent IRS Chief Counsel Advice Memorandum confirmed the agency’s position that an employer may not exclude from an employee’s gross income premium reimbursements received for participating in a wellness program if the premiums were paid on a pre-tax basis. This would, of course, eviscerate the promise of the magical program.

I have seen at least one program that purports to pay the entire wellness reward into the Benefit Bank, which would solve the tax issue, but that would dramatically reduce the employee’s actual take-home pay.

Why isn’t the wellness reward subject to the Equal Employment Opportunity Commission’s Americans with Disabilities Act 30% wellness reward cap?

Under the EEOC’s recent ADA wellness regulations, any wellness program that asks employees to respond to disabilities-related questions and/or that includes any actual medical testing will be subject to a cap of 30% of the premium on any wellness reward or penalty. The programs outlined here obviously include a reward that greatly exceeds the cap. The answer might be that the programs have been carefully modulated to elude the EEOC rules. If that is indeed the case, ACA regulators might at some point consider them to be illegitimate wellness programs.

What happens to these programs when the ACA non-discrimination rules are put into place? 

The Affordable Care Act requires the Department of Treasury to issue rules prohibiting an employer from offering higher-paid full-time employees different benefits or benefits under better terms than lower-paid employees. Treasury officials have indicated they intend to issue rules that will employ an actual participation test. In other words, if an employer has a disproportionate percentage of higher- or lower-paid employees participating in a particular plan, regulators will deem that a violation.

Treasury also intends to include a safe harbor that will be satisfied if all the employer’s plan options satisfy the ACA Minimum Value rules. Preventive-care-only plans do not satisfy those rules. If an employer were to put one of these plans in place and the non-discrimination rules are as we expect them to be, the employer would be forced to select among unsavory choices: terminate the magical plan; terminate any other group plans they may offer (I believe that if an employer only offers a single plan, that should not run afoul of the non-discrimination rules when they are implemented); or pay (exorbitant) penalties.

Flimflam or legitimate plan? I don’t know for sure, but I definitely have some questions.