IRS Clarifies and Partially Delays Prohibition on Individual Health Plan Premium Reimbursements
The IRS recently issued a notice that provides transitional relief to small employers who provide reimbursements for their employees to purchase individual health insurance on the marketplace. With that relief, however, the IRS also clarified that the new interpretation disallowing reimbursements is broader than many realized.
Background
For the last 50 years or so, based on IRS guidance, employers who did not want to provide group health insurance to their employees had the option of reimbursing the employee for the cost of purchasing an individual plan. Most employers did this by setting up Employer Payment Plans (EPPs), such as FSAs, which allowed these amounts to be reimbursed on a pre-tax basis. In 2013, however, the IRS issued a notice that those EPPs that reimburse employees for substantiated health care premiums would be considered group plans under the Affordable Care Act (ACA), and thus would be subject to the ACA’s market reforms. Since these plans impose an annual benefit limit (the amount of the reimbursed premiums) they do not satisfy the ACA requirements, and thus would be subject to a penalty in the form of an excise tax of over $36,000 per employee covered by the non-compliant plan.
Scope of New Interpretation
The notices and guidance on these post-ACA interpretations made it clear that pre-tax reimbursements through EPPs were no longer allowed. The treatment of post-tax reimbursements, on the other hand, was still unclear. While the guidance talked about reimbursements generally, the context led many people to believe that it likely only applied to pre-tax reimbursements. This latest IRS notice has dispelled that notion. When discussing the reimbursement arrangements, the IRS notes: “[T]he arrangement is subject to the market reform provisions of the Affordable Care Act applicable to group health plans without regard to whether the employer treats the money as pre-tax or post-tax to the employee.” So, we now know definitively that any reimbursements to more than one employee for health insurance that the employee purchases, whether on a pre-tax or post-tax basis, will violate the ACA provisions.
Transitional Relief
In this latest notice, the IRS provides some transitional relief from the excise tax that will apply to reimbursements that would otherwise cause the employer to violate the group plan rules of the ACA with one of these EPPs. This relief is limited both in time and scope. In order to qualify for this relief, the employer must have fewer than 50 Full Time Equivalent employees, and the relief from liability will only extend through June 30, 2015. After that date, all employers will be subject to the steep excise tax imposed on EPPs that reimburse health care premiums for an employee’s individually purchased insurance.
Next Steps
Given the IRS’s continued reminders and clarifications on this particular topic, it is unlikely that this interpretation disallowing reimbursements for individually purchased plans will be reversed. We recommend that employers with 50 or more Full Time Equivalent employees immediately review any EPPs to ensure they do not contain reimbursement for premiums and cease any post-tax reimbursement practices they have in place. Small employers will need to conduct a review as well and stop any individual premium reimbursements by June 30.