Several states have either passed or proposed legislation requiring employers to offer their employees the ability to pay for health insurance on a pre-tax basis through a “cafeteria” (or “premium-only”) plan under section 125 of the tax code (a “section 125 plan”). Prior to these initiatives, many employers voluntarily established section 125 plans for this purpose. Recently, some authorities have raised a serious concern about the legality of this arrangement under the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA). Specifically, they maintain that, under the tax code, section 125 plans cannot be used to purchase medically-underwritten individual insurance because doing so would violate HIPAA’s non-discrimination provisions for group plans.
This issue brief explains the basis for this legal concern, and presents contrary legal arguments. It concludes that the current state of the law is unclear and is subject to change.