The Internal Revenue Service, Department of Labor and Department of Health and Human Services have restated their position that employer payment plans (also referred to as premium reimbursement plans) for individual health insurance are prohibited because they fail to comply with the Affordable Care Act (ACA). Employers who fail to comply with the reforms are subject to a $100 per day ($36,500 per year) excise tax for each applicable employee.
What are Employer Payment Plans?
As defined by the IRS, an employer payment plan is an arrangement under which an employer reimburses employees (or pays directly) for all or part of the premium for individual coverage. These plans are also referred to as premium reimbursement plans and according to the IRS are considered to be group health plans that do not comply with ACA requirements. Under the ACA, group health plans are required to cover preventative care and are prohibited to set annual or lifetime dollar limits on essential health benefits. Premium reimbursement plans do not meet these ACA requirements because the annual dollar limit is the amount of the premium reimbursement, not an unlimited amount. Guidance provided previously by the IRS has clarified that regardless if the employer pays or reimburses for premiums on a pre-tax or an after-tax basis these employer payment plans violate the ACA reforms.
Temporary Relief for Small Employers
The IRS has issued Notice 2015-17 which recognizes that small employers have often provided health coverage for their employees by paying directly or reimbursing the cost of premiums for individual policies and that they may need additional time to obtain group health coverage or adopt a suitable alternative. The notice 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).
Small employers that have this type of arrangement with their employees do have an option. The notice does clarify that an employer has the right to increase an employee’s compensation as long as they do not condition the increase on the employee purchasing health coverage, thus not creating an employer payment plan. The extra pay will be subject to income and payroll taxes.
This excise tax may be waived (or reduced) if the employer can show reasonable cause for its failure to comply with the ACA, or demonstrate that its failure was not due to willful neglect. It remains to be seen how generous the IRS will be in waiving or reducing this excise tax.
Relief for S Corporation Healthcare Arrangements
Transitional relief is also provided to shareholders who own more than 2% of an S corporation, but not to employees. Transition relief is granted through the end of 2015 and the S corporation is not required to file IRS form 8928.
Actions Employers Need to Take
- If you have not been offering premium reimbursement plans there is no need to take any action.
- If you are a small employer who has been paying or reimbursing premiums for your employees’ individual insurance you must stop doing so no later than June 30, 2015 or be subject to the excise tax.
- If you are a large employer who paid or reimbursed premiums for your employees’ individual insurance policies in 2014 or continue to do so in 2015, you must self-report and pay the excise tax using IRS Form 8928.
- If you are a small or large employer who has been paying or reimbursing premiums for your employees’ individual insurance you need to decide whether you want to just increase the compensation for employees that you will no longer be reimbursing for premiums.
If you are a current Paypro Client please speak with your dedicated Benefits Specialist to ensure you’re meeting the requirements for your organization’s size. Contact us to learn how Paypro can assist you in keeping your organization compliant. Remember, depending on how many people you employ, your compliance requirements may vary.