The brief re-examines whether individual insurance can be paid on a pre-tax basis through a cafeteria plan in light of federal health reform enacted in 2010.

Prior to the enactment of the Patient Protection and Affordable Care Act (PPACA), many public policymakers were interested in encouraging employers to take advantage of existing federal tax laws in order to make health insurance more affordable for employees.  For instance, several states passed laws requiring or encouraging employers who did not offer group health coverage to establish a cafeteria plan pursuant to section 125 of the tax code in order to allow employees to purchase individual health insurance on a pre-tax basis.  The tax savings that result from using a section 125 plan to pay for health premiums are substantial; the employee does not have to pay federal income or payroll taxes on such amounts, and generally escapes state income taxation as well. 

While section 125 plans appeared to be a viable way to make health insurance more affordable, there was concern that these state laws would inadvertently cause employers to violate the non-discrimination requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) .  PPACA, however, will fundamentally change how individual health insurance is offered and paid for.  Therefore, its passage calls for re-examination of whether individual insurance can be paid on a pre-tax basis through a cafeteria plan.  June 2010.