In Part 2 of this miniseries, we discussed whether a student health insurance plan may be used to help an educational institution avoid penalties under t the Affordable Care Act’s “employer shared responsibility” mandate with respect to individuals who are both students and full-time employees of the institution. Conclusion: it cannot. Nevertheless, certain educational institutions must offer student health insurance, and wish to provide subsidies to certain students (such as graduate students) to help defray the costs of the coverage. Are such subsidies allowed?

The answer depends on whether the subsidy is provided to the student in his or her capacity as a student or as an employee.

In our prior installment, we determined that student health plans are considered “plans in the individual market” under the Internal Revenue Code. In Notice 2013-54, the IRS made clear that an employer cannot use pre-tax funds to pay individual insurance premiums for its employees, and the DOL has further advised in a FAQ that employers cannot use post-tax funds to pay the employees’ premiums either (since such arrangement would create a “group health plan” that does not satisfy the ACA’s insurance market reforms). For a more detailed discussion of these rules, take a look at look at this prior post.

These rules prohibit an educational institution from paying all of part of student health insurance premiums on behalf of its employees; however, subsidies provided to non-employees do not appear to be similarly prohibited.

This conclusion leads to some unclear situations. For example, what if a graduate student’s financial aid package includes loans, scholarships, a paid graduate assistantship, and a subsidy to help pay the student health insurance premiums? In this case, the student is both an employee (by virtue of the paid graduate assistantship) and a student. Can the university take the position that the health care subsidy is being provided to the student in his capacity as a student, and is therefore not prohibited by the IRS and DOL? We would welcome additional guidance from the IRS and DOL on this issue.

One closing thought: an award of taxable, unrestricted cash is clearly permitted and a safe solution. Student workers could always be given a taxable cash stipend in lieu of the premium subsidy. Given that the student health insurance coverage will not help the educational institution meet the employer mandate, this may be the best solution for many schools.

Next up: If students are employees, how are their hours counted?