There are many options for you to choose from when you consider health insurance plans for your business. While having options is generally a good thing, it can also lead to confusion about what types of plans meet the coverage requirements set out by the Affordable Care Act. One market loophole that the ACA has recently addressed involves the sale of indemnity plans.
Indemnity Insurance Plans
Indemnity plans are a type of insurance that pays out money if the insured gets sick or goes to the hospital. For example, a plan might pay $150 a day for each day that you are in the hospital. These plans aren’t actually health insurance plans because the amount they pay out isn’t related to the amount you owe in medical expenses. Indemnity plans don’t fall under the same ACA regulations as traditional health plans do: They can underwrite against pre-existing conditions or set limits to the amount they’ll pay out. The ACA specifically bans these practices for health insurance plans. If you choose to offer an indemnity plan as a supplemental benefit, you will still have to offer traditional health insurance in order to avoid penalties.
What the ACA Addressed
Earlier this year, the Departments of Labor, Treasury and Health answered a number of questions to clarify the conditions of the ACA, according to Health Affairs. Some companies were wrongly marketing indemnity plans as an alternative type of health insurance. The government worried that some Americans would buy these plans thinking that they were fully covered, only to run into trouble later on with huge medical bills. In addition, these plans do not meet the health insurance requirements of the ACA, so an employer who offers only an indemnity plan could face stiff penalties under the employer mandate. If your employees decline your employer-sponsored coverage in favor of an indemnity plan, they will face individual tax penalties for not having insurance.
The ACA’s New Rules
To prevent problems with indemnity plans, the ACA set up a few new rules this year for this type of coverage, according to The Center on Health Insurance Reforms. First, insurers can only sell these plans to those who already have minimum essential coverage. Indemnity plans also cannot be set up in coordination with another health insurance plan, meaning the indemnity plan needs to pay out the same benefit regardless of how much the health insurance plan pays out. Finally, indemnity plans must display a clear notice letting policy holders know that these are not health insurance plans and do not meet the ACA mandate on their own.
These new rulings are not meant to label indemnity plans as bad insurance policies. Indemnity plans are useful in the right situation, and they can be an effective way to pay for deductibles and co-payments. They could also be a way to replace income lost from a long illness or disability. The important thing is that your employees understand that indemnity plans are not true health insurance plans.
This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.
David Rodeck is a professional freelance writer based out of Delaware. Before writing full-time, he worked as a health- and life-insurance agent. He specializes in making insurance, investing and financial planning understandable.