By Phil Larson
Just this week, the IRS provided additional questions and answers on employer payment plans where employers provide reimbursements to employees for individual health insurance premiums either in the Marketplace, Exchanges or otherwise. This guidance once again clarifies several key points.
Employer Payment Plans Do Not Satisfy ACA Requirements
The IRS explains that employee reimbursements for individual health policies will be considered a "group health plan" and generally fail to satisfy the group health plan requirements under the Affordable Care Act (ACA). For example, these programs fail the preventive care mandates and the prohibitions on annual limits for group health plans (among other things). Sometimes these are referred to as part of the "market reform' requirements for health coverage. The employer cannot argue the purchased policy meets these plan requirements because no integration is allowed with individual insurance coverage. This means the "reimbursement" on its own must satisfy these requirements which it cannot do.
Different Facts Yield Same Results
The prohibitions are the same and do not change if (1) the employer is subject to the large employer rules under the ACA or not (but see transition rule below for small employers), (2) the reimbursement is paid with pre-tax or after-tax dollars, (3) it is for all or part of the health cost, (4) it is a reimbursement to the employee or a premium paid directly by the employer to the carrier. In all of these cases, the penalties can still apply.
Taxation of the Benefit Did Not Change
Interestingly enough, the tax rules around these programs did not specifically seem to change. Prior tax rules always seemed to allow these medical reimbursements, even tax free in many cases. See Rev. Rul. 61-146. Instead, the relatively new ACA requirements tied to "group health plans" creates the concern. The IRS specifically states that "Rev. Rul. 61-146 does not address the application of the market reforms and should not be read as containing any implication regarding the application of the market reforms."
What May Be OK
An arrangement where the employee may have "after-tax" amounts applied toward non-endorsed health coverage or take that same amount in cash compensation is not an employer payment plan subject to these prohibitions. In short, a payroll practice to send employee cash to a third party (that the employee can instead simply take in cash) is not a group health plan of the employer--if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met.
Relief may also be available for certain S-Corporations as described in IRS Notice 2015-17. In addition, certain other plans if "excepted" from the market reform requirements may also still be OK. See Code § 9831(b), ERISA § 732(b), PHS Act §§ 2722(b) and 2763. For example, plans with fewer than two employees (like a retiree only plan) are not subject to the preventive care or annual limit prohibitions of the ACA because they qualify as excepted benefits. Some other examples of an excepted plan can include many limited scope dental, vision and flexible spending accounts (FSAs) which are still common today.
If you are self-employed and purchase health insurance coverage for yourself and your family, you will still be eligible for the self-employment health insurance tax deduction. You may claim the deduction regardless of whether you purchase coverage in the individual market or the small group market. However, if you purchase coverage in the individual Marketplace and claim the premium tax credit on your tax return, the amount of the premium reimbursed by the credit may not also be deductible. See TD 9683 and Revenue Procedure 2014-41 for specific rules on how the premium tax credit is coordinated with the self-employment health insurance deduction.
Lastly, certain grandfathered programs set up under an HRA in effect on January 1, 2013 may be OK and reimbursements tied to excepted benefits under HIPAA may be OK (e.g. reimbursements for limited scope vision and dental). Also, a program integrated with another group health plan that meets all requirements of the code may avoid these prohibitions because the combined benefit can satisfy these requirements. The integration rules are complex however and outside of the scope of this summary.
Self-Employed Coverage
While this article is about employer coverage, if you are self-employed and purchase health insurance coverage for yourself and your family, you may be eligible for the self-employment health insurance tax deduction. This is true if you purchase coverage in the individual market or in the small group market. However, the rules do not allow double dipping with Marketplace credits. If you receive premium tax credits and purchase coverage in the individual Marketplace, the amount of the premium reimbursed by the credit may not be deducted.
Amount of the Penalty
From the IRS viewpoint, failing the market reform rules can cost up to $100/day per applicable employee (totaling $36,500 per year). This penalty is found under 26 USC 4980D. This section is used for other penalties for group health plan compliance failures. Please keep in mind that excise taxes are normally not deductible making this penalty even higher. The employer or other persons responsible for providing or administering benefits under a group health plan must file Form 8928 to pay these taxes. This is a self-reporting obligation.
Transition Rules
On February 18, 2015, the IRS issued Notice 2015-17, which provides transition relief from the excise tax under § 4980D for failure to satisfy the group health plan requirements in certain circumstances. Special transition rules may also apply for employer healthcare arrangements that constitute (1) employer payment plans, as described in Notice 2013-54, if the plan is sponsored by an employer that is not an Applicable Large Employer (ALE) under Code § 4980H(c)(2) and §§54.4980H-1(a)(4) and -2; (2) S corporation healthcare arrangements for 2-percent shareholder-employees; (3) Medicare premium reimbursement arrangements; and (4) TRICARE-related health reimbursement arrangements. If all the requirements are met, this relief either applied from 2014 to June 30th, 2015 or all of 2015 depending on which transition relief is used. The relief did not apply to stand alone HRAs or HRAs that reimburse expenses other than insurance premiums.
Not New Guidance.
The IRS, DOL and HHS have been saying these points since September 2013 in Notice 2013-54 and in several subsequent forms of guidance. See IRS Notice 2015-17 and DOL Technical Release 2013-03; January 2013 DOL and HHS issued FAQs on the application of the Affordable Care Act to reimbursements; and Nov. 6, 2014, DOL issued additional FAQs on the application of the Affordable Care Act to certain arrangements. [Update: the Office of Chief Counsel of the IRS also published an information letter 2016-0019 stating that these arrangements do not comply with the ACA market reform requirements and that they disagree with the schemes that are being promoted to reimburse individual health policy premiums. Additionally, the 21st Century Cures Act now allows small employers to provide Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) in very limited instances provided several conditions are met].
These rules are difficult to navigate and the summary above is abbreviated for length. If you need help understanding these requirements or the ACA generally, please contact Kinney & Larson LLP.
Just this week, the IRS provided additional questions and answers on employer payment plans where employers provide reimbursements to employees for individual health insurance premiums either in the Marketplace, Exchanges or otherwise. This guidance once again clarifies several key points.
Employer Payment Plans Do Not Satisfy ACA Requirements
The IRS explains that employee reimbursements for individual health policies will be considered a "group health plan" and generally fail to satisfy the group health plan requirements under the Affordable Care Act (ACA). For example, these programs fail the preventive care mandates and the prohibitions on annual limits for group health plans (among other things). Sometimes these are referred to as part of the "market reform' requirements for health coverage. The employer cannot argue the purchased policy meets these plan requirements because no integration is allowed with individual insurance coverage. This means the "reimbursement" on its own must satisfy these requirements which it cannot do.
Different Facts Yield Same Results
The prohibitions are the same and do not change if (1) the employer is subject to the large employer rules under the ACA or not (but see transition rule below for small employers), (2) the reimbursement is paid with pre-tax or after-tax dollars, (3) it is for all or part of the health cost, (4) it is a reimbursement to the employee or a premium paid directly by the employer to the carrier. In all of these cases, the penalties can still apply.
Taxation of the Benefit Did Not Change
Interestingly enough, the tax rules around these programs did not specifically seem to change. Prior tax rules always seemed to allow these medical reimbursements, even tax free in many cases. See Rev. Rul. 61-146. Instead, the relatively new ACA requirements tied to "group health plans" creates the concern. The IRS specifically states that "Rev. Rul. 61-146 does not address the application of the market reforms and should not be read as containing any implication regarding the application of the market reforms."
What May Be OK
An arrangement where the employee may have "after-tax" amounts applied toward non-endorsed health coverage or take that same amount in cash compensation is not an employer payment plan subject to these prohibitions. In short, a payroll practice to send employee cash to a third party (that the employee can instead simply take in cash) is not a group health plan of the employer--if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met.
Relief may also be available for certain S-Corporations as described in IRS Notice 2015-17. In addition, certain other plans if "excepted" from the market reform requirements may also still be OK. See Code § 9831(b), ERISA § 732(b), PHS Act §§ 2722(b) and 2763. For example, plans with fewer than two employees (like a retiree only plan) are not subject to the preventive care or annual limit prohibitions of the ACA because they qualify as excepted benefits. Some other examples of an excepted plan can include many limited scope dental, vision and flexible spending accounts (FSAs) which are still common today.
If you are self-employed and purchase health insurance coverage for yourself and your family, you will still be eligible for the self-employment health insurance tax deduction. You may claim the deduction regardless of whether you purchase coverage in the individual market or the small group market. However, if you purchase coverage in the individual Marketplace and claim the premium tax credit on your tax return, the amount of the premium reimbursed by the credit may not also be deductible. See TD 9683 and Revenue Procedure 2014-41 for specific rules on how the premium tax credit is coordinated with the self-employment health insurance deduction.
Lastly, certain grandfathered programs set up under an HRA in effect on January 1, 2013 may be OK and reimbursements tied to excepted benefits under HIPAA may be OK (e.g. reimbursements for limited scope vision and dental). Also, a program integrated with another group health plan that meets all requirements of the code may avoid these prohibitions because the combined benefit can satisfy these requirements. The integration rules are complex however and outside of the scope of this summary.
Self-Employed Coverage
While this article is about employer coverage, if you are self-employed and purchase health insurance coverage for yourself and your family, you may be eligible for the self-employment health insurance tax deduction. This is true if you purchase coverage in the individual market or in the small group market. However, the rules do not allow double dipping with Marketplace credits. If you receive premium tax credits and purchase coverage in the individual Marketplace, the amount of the premium reimbursed by the credit may not be deducted.
Amount of the Penalty
From the IRS viewpoint, failing the market reform rules can cost up to $100/day per applicable employee (totaling $36,500 per year). This penalty is found under 26 USC 4980D. This section is used for other penalties for group health plan compliance failures. Please keep in mind that excise taxes are normally not deductible making this penalty even higher. The employer or other persons responsible for providing or administering benefits under a group health plan must file Form 8928 to pay these taxes. This is a self-reporting obligation.
Transition Rules
On February 18, 2015, the IRS issued Notice 2015-17, which provides transition relief from the excise tax under § 4980D for failure to satisfy the group health plan requirements in certain circumstances. Special transition rules may also apply for employer healthcare arrangements that constitute (1) employer payment plans, as described in Notice 2013-54, if the plan is sponsored by an employer that is not an Applicable Large Employer (ALE) under Code § 4980H(c)(2) and §§54.4980H-1(a)(4) and -2; (2) S corporation healthcare arrangements for 2-percent shareholder-employees; (3) Medicare premium reimbursement arrangements; and (4) TRICARE-related health reimbursement arrangements. If all the requirements are met, this relief either applied from 2014 to June 30th, 2015 or all of 2015 depending on which transition relief is used. The relief did not apply to stand alone HRAs or HRAs that reimburse expenses other than insurance premiums.
Not New Guidance.
The IRS, DOL and HHS have been saying these points since September 2013 in Notice 2013-54 and in several subsequent forms of guidance. See IRS Notice 2015-17 and DOL Technical Release 2013-03; January 2013 DOL and HHS issued FAQs on the application of the Affordable Care Act to reimbursements; and Nov. 6, 2014, DOL issued additional FAQs on the application of the Affordable Care Act to certain arrangements. [Update: the Office of Chief Counsel of the IRS also published an information letter 2016-0019 stating that these arrangements do not comply with the ACA market reform requirements and that they disagree with the schemes that are being promoted to reimburse individual health policy premiums. Additionally, the 21st Century Cures Act now allows small employers to provide Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) in very limited instances provided several conditions are met].
These rules are difficult to navigate and the summary above is abbreviated for length. If you need help understanding these requirements or the ACA generally, please contact Kinney & Larson LLP.
