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IRS signals grad student health plans need overhaul

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The IRS has given colleges and universities more time to scrap long-established health insurance plans offered to student teaching assistants and devise new approaches, but the plans' end looks to be in sight.

In Notice 2016-73, the IRS affirmed earlier guidance that a widespread approach colleges and universities use to provide health coverage to students — typically graduate teaching assistants — flunks provisions of the health care reform law.

In what the IRS calls “employer payment” plans, schools buy and pay most or all of the premium for individual policies purchased from commercial insurers.

“These arrangements, by their very definition, include dollar limits on the amount of reimbursements or payments, and therefore violate the Affordable Care Act prohibition on annual dollar limits,” the IRS said in its February notice.

“The IRS views these students as employees, and therefore you cannot subsidize the cost of individual policies for them,” said Steven Bloom, director of federal relations at the American Council on Education in Washington.

The IRS is saying, “No employer can reimburse an employee for all or some of the premium for individual health insurance,” said Rich Stover, a principal at Xerox HR Services in Secaucus, New Jersey.

Still, the IRS said it recognizes “schools may need additional time to adopt a suitable alternative or make other arrangements to come into compliance,” and said its rules would not apply for student health plan years starting prior to Jan. 1, 2017.

Since health plans typically start with the beginning of college and university academic years in the fall, many schools will have about 18 months to devise new approaches.

“This is something colleges and universities will have to address, but at least they will have time,” said J.D. Piro, a senior vice president at Aon Hewitt in Norwalk, Connecticut.

Benefit experts say colleges and universities will consider several approaches: extending their group health plans to working students, such as teaching assistants, and giving students cash, which they could use to purchase health insurance coverage.

“I think many colleges/universities will work to extend eligibility for the employer-sponsored group health plan. This is probably going to end up being the easiest approach because the group health administration structure is already there,” said Jen Faifer, a principal at Mercer L.L.C. in Chicago.

The “approach will vary by school depending on needs and student issues,” Xerox's Mr. Stover said.

Some schools hope Congress may intervene to block the rules.

“The major research universities across the country have mobilized their congressional delegations to address the IRS ruling so that beginning in 2017, we may be able to continue to offer the same insurance coverage that we have always offered,” said a spokeswoman for University of Missouri in Columbia.

“We have not given up hope,” said the Mr. Bloom of the American Council on Education. “We are exploring avenues on Capitol Hill. I don't believe this is what the White House thought that this is what the ACA intended to do.”

“Colleges and universities are likely to develop some alternative scenarios, but wait until after the election to decide whether to implement them,” said Amy Bergner, managing director of people and organization at PricewaterhouseCoopers L.L.P in Washington.

But others doubt Congress will intervene.

“It is unlikely that Congress would pass and President Obama would sign legislation impacting the reach of the ACA,” said Andy Anderson, a partner at Morgan, Lewis & Bockius L.L.P. in Chicago.

In fact, colleges and universities recognize that congressional intervention or the IRS changing its position are far from certain.

“Depending on what the relevant agencies advise us, we may have to find a new solution to the problem. While we cannot predict what the agencies will do, we can predict our own institutional behavior,” the University of Missouri spokeswoman said.