Section 125 Plans in the Post-Reform Environment

Prior to the enactment of health reform, many policy-makers were interested in boosting coverage rates by encouraging employers who do not offer health insurance to establish plans that allow employees to purchase insurance with pre-tax dollars.

Known as “cafeteria plans,” these plans were set up under section 125 of the U.S. tax code. According to a new issue brief from the State Health Access Reform Evaluation (SHARE) program, a national program of the Robert Wood Johnson Foundation, although the tax savings that result from using a section 125 plan to pay for insurance premiums are substantial, uncertainty about whether the plans might violate the Health Insurance Portability and Accountability Act of 1996 (HIPAA) regulations leads many insurers and benefits advisors to back away from the plans.

The brief, compiled by researchers from Wake Forest University and the University of Minnesota, focuses on the implication of health reform for the future use of section 125 plans.

The authors conclude that while reform provisions provide fairly strong arguments allowing individual insurance policies to be purchased through a section 125 plan, federal regulators need to give employers, insurers and public policy officials clear guidance on how section 125 plans can be used for any type of comprehensive individual health insurance sold outside of exchanges.