Health Care Reform, HRAs & HSAs

IRS Reiterates that Employer Pre-Tax Reimbursement for Individual Policies is Prohibited

For a subsequent article on this site on this same topic, click here (extending the deadline to June 30, 2015, for small employers).

On May 13, 2014, the IRS issued a Q&A reiterating that employers are prohibited from reimbursing employees on a pre-tax basis for premiums employees pay for individual health insurance policies, either in or outside the Exchange/Marketplace. The Q&A cited IRS Notice 2013-54 and PPACA market reforms. The IRS Q&A does not prohibit employers from increasing employees’ compensation so they can purchase individual health insurance policies. The one-page IRS Q&A (reprinted below) is at:  http://www.irs.gov/uac/Newsroom/Employer-Health-Care-Arrangements

IRS Rationale for Why These Pre-Tax Reimbursement Accounts are NOT OK

The IRS Q&A notes that pre-tax employer payment plans are considered to be group health plans subject to the PPACA market reforms, including the prohibition on annual limits for essential health benefits (EHBs) and the requirement to provide certain preventive care without cost sharing.  Such reimbursement arrangements cannot be integrated with individual policies in order to meet the market reforms.  Consequently, the IRS Q&A warns: “such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.”

Some Vendors Continue to Offer Pre-Tax Reimbursement Plans

Despite the issuance of Notice 2013-54 (and DOL Tech. Rel 2013 -03) last September, several vendors continue to offer pre-tax medical reimbursement accounts and claim they are permissible under IRC section 105. It seems the purpose of the May 13th Q&A is to reiterate that such accounts are not permissible, but I know from a recent discussion with one of the vendors that as of last week (shortly after the IRS Q&A was issued) they continued to believe their product was permissible because:

  • the reimbursement is not via an IRC section 125 cafeteria plan (but instead is via a 105 reimbursement account),
  • IRC 105 allows medical reimbursement plans to reimburse pre-tax for individual premiums and other medical expenses, and the IRS cannot by regulation dismantle IRC 105
  • the plan does not cover essential health benefits but only reimburses employees for premiums they pay (so they claim the plan does not violate PPACA’s prohibition on annual limits for EHBs), and
  • the reimbursement plan would be obligated to pay first dollar coverage of preventive services if the underlying individual health policy did not (so it does not violate the requirement to provide first-dollar coverage of preventive services).

Employers who are considering offering these pre-tax reimbursement accounts should consult with their legal counsel, since the IRS seems to be making a point to let employers know these arrangements are NOT permissible and will result in excise taxes on the employer. 

Following is the full text of the May 13, 2014 IRS Q&A:

Q1.  What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?

Under IRS Notice 2013-54, such arrangements are described as employer payment plans. An employer payment plan, as the term is used in this notice, generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.  Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms.  Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.

Q2. Where can I get more information?

On Sept. 13, 2013, the IRS issued Notice 2013-54 , which explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy.

DOL has issued a notice in substantially identical form to Notice 2013-54, DOL Technical Release 2013-03, and HHS will shortly issue guidance to reflect that it concurs with Notice 2013-54. On Jan. 24, 2013, DOL and HHS issued FAQs that addressed the application of the Affordable Care Act to HRAs.

4 Comments

  1. Lisa –

    Thank you for raising this topic on the importance of compliance.

    It is true, a business cannot reimburse its employees’ individual health care premiums without an ACA compliant group health plan.

    Revenue Ruling 61-146 defines an employer payment plan as an arrangement under Section 106 of the IRC, for an employer to reimburse an employee directly for his/her share of the premiums or for an employer to issue a check directly to the employee’s insurance company on his behalf. Companies that do this will be out of compliance with the Affordable Care Act because they are putting a cap on preventive care, and therefore a cap on essential health benefits as well. IRS Notice 2013-54 which you mention, states that a group health plan that puts a cap on either essential health benefits or preventive care will be considered out of compliance with market reforms and subject to the excise tax.

    However, this does not preclude a company from setting up a premium reimbursement arrangement that also reimburses for preventive care without a cap.

    Here’s how we (at Zane Benefits), have interpreted the FAQ: http://www.zanebenefits.com/blog/irs-faq-underscores-importance-of-compliance-with-aca-rules

  2. Christina, I’m concerned with an employer using a Medical Reimbursement plan for individual coverage for employees. With the new law, my understanding is that employers have to offer all employees coverage with a waiting period of no longer than 90 days. If you hire an employee who has no current medical coverage and your outside the open enrollment window, how is it possible for the employee to get covered. And if not, wouldn’t they be violating the HCR law? Thanks, Steve

    1. This is a great topic, currently trying to research this, small business few employees and what to do?? We are not able to get the 70% participation that is required. I looked into the reimbursement strategy mentioned by Christina from Zanebenefits, but then read what Steve posted I am nervous about executing anything. I want to be in compliance. Any other advice out there? Any new updates?

  3. If an employer does not offer health insurance and has less than 50 employees:

    Can the employer deduct the individual health insurance premiums pre-tax through payroll, and then reimburse the employee after they have paid their premium to provide a pre tax benefit?