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PRAs: A Different Kind of Cafeteria Plan Entrée
by Rich Glass, JD

Imagine a different kind of cafeteria. Instead of serving traditional fare like chicken, mashed potatoes, and lemon meringue pie, this cafeteria allows customers to bring whatever food they want to the cash register. Then, in a unique twist, the customer is reimbursed for their food on a pre-tax basis, of course.

This may sound a little far-fetched for a restaurant, but it is perfectly feasible in delivering health benefits through an employer-sponsored cafeteria plan. Premium reimbursement accounts (PRAs) allow employees to choose the type of insurance coverage they want and pay for it on a pre-tax basis. A single employee in her 20s would be able to choose a plan that is very different from that of a 30-something employee whose family is in growth mode. Another PRA option would be to pay for COBRA coverage through a previous employer.

Employers benefit also. They are spared the headaches involved with sponsoring a health plan, such rate increases, plan documentation and reporting, HIPAA and COBRA. The IRS officially blessed the PRA as a cafeteria plan benefit option in the Proposed Cafeteria Plan Regulations issued in August 2007. The IRS previously approved the concept of pre-taxing individual premiums back in 1961 in Revenue Ruling 61-146.
In the Proposed regs, the IRS confirmed three different methods of reimbursement:
1. The plan reimburses the employee directly after reviewing proof of premium payment.
2. The plan issues the employee a check payable to the insurance carrier.
3. The plan issues the employee a check payable jointly to the carrier and the employee.

While not entirely clear, it appears that the cafeteria plan could only reimburse the employee’s premiums, not the premiums of the employee’s spouse or dependents. There is also the issue of “list billing” in which the plan pays the carrier directly for premiums on a variety of individual policies. While the IRS did not officially endorse list billing, this longstanding practice is probably acceptable as an extension of option to issue a check payable to the insurance carrier. More IRS guidance is needed.
Since the PRA can be a win-win for employer and employee, you might expect to see an increase in the use of PRAs in the coming years, given the higher healthcare costs. However, before adding a PRA as a benefit option, employers should be aware of a few dark clouds to this silver lining. The issues primarily relate to four laws: ERISA, COBRA, HIPAA, and Section 125 itself.

ERISA and PRAs

The individual insurance could be construed as an employer-sponsored group health plan if there is sufficient employer endorsement. This would result in ERISA application and would subject the PRAs to ERISA reporting and notice rules, among other requirements. To avoid ERISA application, a prudent employer would want the PRAs to qualify for the voluntary plan safe harbor:
• The employer makes no contributions.
• Participation is voluntary.
• The only employer functions are allowing carriers to publicize their policies, collecting, and remitting premiums.
• The employer does not profit in any way from the PRAs.
An employer can contribute to employees’ PRAs just like it shares premium costs for employer-sponsored coverage. But if it does, ERISA will apply.

COBRA and PRAs

If ERISA applies, COBRA will apply also unless an exception exists, such as for small employers. This presents additional problems. First, the carrier may have policy provisions that allow it to cancel coverage for reasons that are impermissible in COBRA. In such a case, the employer might be on the hook to self-insure the remaining months of COBRA. Second, the carrier may want to increase premiums at varying times, which might run afoul of the COBRA rule that premiums must be fixed throughout a 12-month determination period. Third, the employer would want to clarify who should handle reporting of secondary events and disability extensions.

HIPAA and PRAs

If there is a group health plan, many provisions of HIPAA are likely to be applicable unless the plan is an excepted benefit (dental and vision plans). For example, HIPAA’s portability rules require plans to provide special enrollment rights and certificates of creditable coverage. Will the carriers follow the same rules? If the carrier does not do so, employees may look to the employer that is sponsoring the cafeteria plan.
In addition, HIPAA has a nondiscrimination rule that prohibits group health plans from taking any health factor into account when determining eligibility, benefits, or costs. Almost by definition, individual policies take into account factors, such as claims experience and medical history in determining eligibility and premiums. In other words, an unhealthy person is unlikely to receive the same policy at the same cost. One way around the nondiscrimination requirement is to limit PRAs to policies that are subject to HIPAA guaranteed issue renewability requirements.

Section 125 and PRAs

Because the PRA is a cafeteria plan option, it is subject to many of the basic rules. First, cafeteria plan elections are generally irrevocable unless there is a change of status or other permissible exception. If an employee drops or loses individual coverage mid-year, the PRA deductions would normally have to continue until the end of the plan year.

Second, cafeteria plan benefits cannot defer compensation from one plan year to the next. PRA reimbursements would need to be limited to coverage for that plan year. This may require employees to prepay for the first month of coverage in a plan year and then seek reimbursement.

Conclusion

The PRA can be a viable alternative for employers to sponsor a group health plan, especially if the alternative is offering nothing at all. But employers need to be aware of the risks. As yet, there is no specific, formal guidance on how or if PRAs would be subject to ERISA, COBRA, and HIPAA. The IRS and Dept. of Labor have noted that this is a gray area. Employers should not be dismayed by the uncertainties. With thorough planning, careful risk evaluation, and clear communication, employers can make the PRA a delicious entrée on their cafeteria plan menu.
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Rich Glass is Chief Compliance Officer for Infinisource Inc, a benefits educator and administrator serving more than 15,000 clients nationwide in the areas of COBRA, HIPAA and Flexible Benefits, including Premium Reimbursement Accounts and HSAs. He is a licensed attorney with more than 15 years of legal expertise, specializing in benefits, Human Resources, and related regulatory compliance issues. For more information, visit rtglass@infinisource.net.