May an employer offer sick workers money to move to a health insurance exchange?


In order to reduce health care costs, your company is considering a strategy where it would offer certain high claims risk employees a generous payment of $10,000 if they waive coverage under your self-insured plan and instead buy coverage under the public health insurance exchange. Is this strategy legal?


No. Public Health Service Act Sec. 2705, which was incorporated by reference into ERISA Sec. 715 and Internal Revenue Code Sec. 9815, as well as the nondiscrimination provisions of ERISA Sec. 702 and Internal Revenue Code Sec. 9802 originally added by the Health Insurance Portability and Accountability Act (HIPAA), prohibit discrimination based on one or more health factors. Offering only employees with a high claims risk a choice between enrollment in the standard group health plan or cash constitutes such discrimination.

In the view of the Departments of Labor, Health and Human Services (HHS), and the Treasury, cash-or-coverage arrangements offered only to employees with a high claims risk does not constitute permissible benign discrimination. Accordingly, such arrangements will violate the nondiscrimination provisions regardless of whether:

    (1) the cash payment is treated by the employer as pre-tax or post-tax to the employee;

    (2) the employer is involved in the selection or purchase of any individual market product; or

    (3) the employee obtains any individual health insurance.

Also, because the choice between taxable cash and a tax-favored qualified benefit (the election of coverage under the group health plan) is required to be a Sec. 125 cafeteria plan, imposing an effective additional cost to elect coverage under the group health plan (the declined $10,000) could, depending on the facts and circumstances, result in discrimination in favor of highly compensated individuals in violation of the cafeteria plan nondiscrimination rules.

Source: FAQs about Affordable Care Act Implementation (Part XXII), issued November 6, 2014,

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