Health Care Reform, HRAs & HSAs, Insurance Market Reforms, Penalties, Small Employers

No Penalties through June 30, 2015 for Premium Reimbursement Plans of Small Employers

In the past two years the IRS, DOL, and HHS have issued three FAQs and one Notice stating and reiterating their position that “employer payment plans” are prohibited because they fail to comply with certain Affordable Care Act (ACA) market reforms.  On February 18, 2015, the IRS issued Notice 2015-17, which again reiterates this position, but also provides transition relief in certain circumstances from the $100 per day excise tax (under Code section 4980D) which would otherwise apply to group health plans that do not comply with ACA market reforms.  This transition relief applies only to small employers (those who had fewer than 50 full-time employees) and only through June 30, 2015.

Notice 2015-17 also provides transition relief for Sub-S corporations, and this relief applies through the end of 2015; and it addresses the issue of whether employers can reimburse active employees for Medicare Part B or D premiums or can use an HRA to reimburse TRICARE enrollees for medical expenses.  The DOL and HHS have reviewed and agree with the guidance provided in Notice 2015-17.

Being a parent, I can’t help but see the premium reimbursement issue as akin to a parent who tells the children four times that certain behavior is prohibited.  Since some of the children continue to do it anyway (because another kid assures them it’s OK), the parent then tells them for the fifth time that it is still not OK but the little kids (employers with fewer than 50 employees) can continue to do it for another 4½ months, after which time they will be punished if they continue to do it.  Big kids will be punished now if they have continued to do it. Maybe the IRS is concerned, as parents might be, that the “little kids” truly didn’t understand exactly what behavior was prohibited, and doesn’t want to unfairly punish them.

This article explains Notice 2015-17 and the rationale behind it.

The Problem with Employer Payment Plans

An “employer payment plan” is defined in Notice 2015-17 (and prior guidance) as an arrangement under which an employer reimburses employees (or pays directly) for all or part of the premium for individual coverage.  Many employers and advisors refer to these as “premium reimbursement plans.”   The problem with them is that the IRS considers them to be a type of “group health plan” to which various ACA market reforms apply, such as the requirement to cover preventive care, and the prohibition on annual or lifetime dollar limits on essential health benefits. Premium reimbursement plans, by definition, cannot meet these ACA requirements (e.g., because the annual dollar limit is the amount of the premium reimbursement, not an unlimited amount).

Group health plans of any size that fail to comply with ACA market reforms may be subject to an excise tax of $100 per day for each affected employee (that’s $36,500 per year for each affected employee).  Additionally, employers are supposed to self-report their violations and pay the excise tax using IRS Form 8928.

Prior IRS guidance has clarified that these employer payment plans violate the ACA market reforms whether the employer pays or reimburses for premiums on a pre-tax or an after-tax basis.   Notice 2015-17 also acknowledges that such arrangements on a pre-tax basis would not be taxable to employees (per Code section 106), but that they are, nonetheless, not compliant with ACA market reform requirements so will subject the employer to the section 4980D excise tax of $100 per day per affected employee.

Transition Relief for Employer Payment Plans

Notice 2015-17 explicitly recognizes that in the past small employers have often provided health coverage for their employees by paying directly or reimbursing the cost of premiums for individual policies, and such employers “may need additional time to obtain group health coverage or adopt a suitable alternative.”  Thus, it provides small employers the following transition relief from the excise tax that would otherwise apply for employer payment plans:

  • No tax for employer payment plans in 2014 for employers who had fewer than 50 full-time employees for at least 6 consecutive months in 2013, and
  • No tax for employer payment plans through June 30, 2015, for employers who had fewer than 50 full-time employees for at least 6 consecutive months in 2014.

The transition relief does not apply for employers who had more than 50 full-time employees (or full-time equivalents) who offered employer payment plans in 2014 or continue to offer them in 2015, and the relief does not apply for small employers after June 30, 2015.   Additionally, the relief does not apply to stand-alone health reimbursement arrangements (HRAs).

Simply Increasing Employee Compensation is Allowable

Notice 2015-17 does clarify that an employer payment plan is not created if an employer simply increases an employee’s compensation but does not condition the increase on the employee purchasing health coverage.  Such an increase in compensation does not constitute a group health plan, so it is not subject to the market reforms.  An employer can provide employees with information about the marketplace or the premium tax credit under Code section 36B.

Transition Relief for Certain S Corporation Healthcare Arrangements

Notice 2015-17 also grants transition relief for subchapter S corporation premium reimbursement arrangements for 2-percent shareholders, but not for employees.  Transition relief is granted through the end of 2015, not just through June 30th, and the S corporation will not be required to file IRS Form 8928.

ACA market reforms apply only to group health plans that have two or more participants who are current employees on the first day of the plan year.  If an S corporation maintains separate premium reimbursement arrangements for individual employees (in an attempt to avoid being subject to this requirement), all such arrangements will be treated as one single arrangement, so will be a group health plan subject to the market reforms.

Notice 2015-17 does not address treatment of similar premium reimbursement arrangements under partnerships, LLPs or LLCs, although similar tax treatment applies under these for partners and LLC members.  Further guidance would be appreciated on this.

Employer Payments for Medicare Premiums or Medical Expenses of TRICARE Enrollees

Notice 2015-17 provides that Medicare premium reimbursement arrangements (for Medicare Part B or D) for active employees are considered employer payment plans, and they are subject to the ACA market reforms if they cover two or more active employees. Thus such reimbursement arrangements are not allowed.  An employer payment plan may not be integrated with Medicare coverage to satisfy the market reforms, but it can meet the market reforms if it is integrated with another group health plan offered by the employer and:

  • the employer offers the employee a group health plan (other than the Medicare premium reimbursement plan) that provides minimum value and does not consist solely of excepted benefits
  • the employee who receives Medicare premium reimbursements is actually enrolled in Medicare Parts A and B
  • the employer reimbursement plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D, and
  •  the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.

The guidance notes that such an arrangement may be subject to restrictions under other laws such as the Medicare secondary payer provisions.

The IRS analysis of Health Reimbursement Accounts (HRAs) that reimburse employees who are also enrolled in TRICARE for medical expenses is basically the same as the analysis above for employer reimbursements for Medicare premiums:  such arrangements are group health plans subject to ACA market reforms, and they cannot be integrated with TRICARE because it is not a group health plan. They can, however, be integrated with another group health plan offered by the employer if they meet the four requirements bulleted above, but substituting “TRICARE” for “Medicare” and in the fourth bullet point the HRA is limited to reimbursement of cost-sharing and excepted benefits, including TRICARE supplemental premiums.

Next Steps for Employers

Employers who have not been offering premium reimbursement plans need not take any action.

Small employers who have been paying or reimbursing premiums for individual insurance contracts must stop doing so no later than June 30, 2015, to avoid being subject to the 4980D excise tax.

Large employers who paid or reimbursed premiums for individual insurance policies in 2014 or who do so in 2015 need to self-report and pay the excise tax using IRS Form 8928.

Small and large employers who have been paying or reimbursing premiums for individual insurance should decide whether they want to just increase compensation for employees for whom the employer will no longer be reimbursing for premiums.

You might want to link to “Chart of Disallowed Pay or Play Tactics” by Christine Roberts, J.D., who has an excellent site called “E is for ERISA.”  This chart includes information on other disallowed tactics as well as the employer payment plans.

Prior Guidance on this Topic

  • FAQs About Affordable Care Act Implementation (Part XI), issued on January 24, 2013 by DOL and HHS
  • IRS Notice 2013-54 and DOL Technical Release 2013-03, issued on September 13, 2013;
  • IRS FAQ on Employer Healthcare Arrangements and
  • FAQs About Affordable Care Act Implementation (Part XXII), issued on November 6, 2014 by DOL  and HHS.

4 Comments

  1. Lisa – I am a CPA working with numerous “small employers” and I am still a bit confused by certain aspects of the ACA. Specifically, are employers able to integrate Medicare insurance premium reimbursement with another group health plan and have such payments be a tax free benefit and also avoid the $100 per day penalty? thank you.

    1. Bob,
      Yes. As noted above, Notice 2015-17 provides that employers can integrate Medicare insurance premium reimbursement arrangements (for Medicare Part B or D) for active employees with employer group health care plans, in order to comply with ACA market reforms, IF:
      •the employer offers the employee a group health plan (other than the Medicare premium reimbursement plan) that provides minimum value and does not consist solely of excepted benefits
      •the employee who receives Medicare premium reimbursements is actually enrolled in Medicare Parts A and B
      •the employer reimbursement plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D, and
      • the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.

      The guidance notes that such an arrangement may be subject to restrictions under other laws such as the Medicare secondary payer provisions.

      If the Medicare ins. premium reimbursement plan covers fewer than two active employees (e.g., covers retirees, and can cover one active EE), then the plan is not subject to the ACA market reforms.

  2. I’m still a little confused about some of the wording. I have an employee that I make health insurance reimbursements payments to. She doesn’t have an individual plan. She is listed as a dependent on her husband’s employer sponsored group health insurance which is ACA compliant. Does this apply to her situation? And does that make the reimbursement taxable income to her?

    Thanks,
    Donna

  3. I am 71 years of age, working full time and paying my medicare and Blue Cross. Medicare is my primary payor and Blue Cross secondary. My company gives an opt out payment yearly to employees who pay for their own coverage. They are now telling me that they cannot give me the opt out payment because I have medicare. I read an article from medicare stating that this is applicable only if medicare is my secondary payor. Medicare is my primary payor. When I worked part time, they reimbursed me quarterly for my heathcare coverage. It was the same then as it is now. Help!!