IRS Publishes Helpful Guidance on Reimbursing Employees’ Individual Health Insurance Premiums
The IRS has published new guidance to clarify that no matter how a reimbursement arrangement is structured or what the reimbursement arrangement is named, reimbursement of employees’ individual health insurance policies violates certain mandates under Health Care Reform. The new IRS Notice 2015-17 affirms and expands upon earlier guidance addressing this issue. To encompass all such arrangements, the IRS coined a new term: “employer payment plans.”
The penalty for violating Health Care Reform’s mandates is contained in Section 4980D of the Internal Revenue Code (Code) and is severe. Section 4980D of the Code imposes an excise tax on an employer that sponsors an employer payment plan of $100 per “affected individual” per day for each day that the employer payment plan violates Health Care Reform’s mandates. (While it is not entirely clear, it appears that affected individual means each employee who is a participant—i.e., receives a reimbursement of premiums—from the employer payment plan.)
IRS Notice 2015-17 provides: (1) temporary relief from the excise tax under Section 4980D of the Code for certain “small employers” that sponsor employer payment plans; (2) guidance on reimbursement of individual health insurance policies of more-than-2% S-corporation shareholders; (3) guidance on reimbursement of Medicare premiums, and medical expenses of employees covered by TRICARE; (4) guidance on when certain arrangements will not constitute an employer payment plan; and (5) clarification that after-tax reimbursement of employees’ individual health insurance policies is an employer payment plan.
Temporary Excise Tax Relief for Certain Small Employers
Health Care Reform’s prohibition on annual limits and preventive care services mandate were generally effective on January 1, 2014. So, employers that maintain employer payment plans are potentially subject to an excise tax beginning as early as January 1, 2014. But, IRS Notice 2015-17 provides key new relief for “small employers.”
A small employer is generally an employer that employs, on average, less than 50 full-time employees and full-time equivalent employees on business days in the previous calendar year. (In other words, small employers are employers that are not subject to Health Care Reform’s pay or play penalty. For more information on the pay or play penalty, see our Priority Alert here.)
Under the temporary relief, employer payment plans sponsored by small employers that reimburse employees for individual health insurance policies or Medicare Part B or Part D premiums are not subject to the excise tax under Section 4980D of the Code for a certain period of time. The temporary relief applies: (1) for all of 2014 for employers that are small employers in 2014; and (2) from January 1, 2015 to June 30, 2015 for employers that are small employers in 2015.
More-than-2% S-Corporation Shareholders
Historically, it was permissible for S-corporations to reimburse its more-than-2% shareholders for the costs of individual health insurance policies (i.e., under the Code, more-than-2% shareholders are employees of the S-corporation). Under this arrangement, the reimbursement is treated as taxable income to the more-than-2% shareholder who then deducts the cost of the individual health insurance policy on his or her income tax return. (These arrangements are typical in single-member S-corporations in which the sole shareholder is the only employee. This is because the single employee is not eligible for a “group” health insurance policy.)
IRS Notice 2015-17 addresses two issues related to these types of arrangements. First, until the IRS issues further guidance (and at least through 2015), an employer payment plan that reimburses more-than-2% shareholders for the cost of individual health insurance policies will not be subject to the excise tax under Section 4980D of the Code. Second, reimbursement of a single employee (e.g., in the case where the S-corporation shareholder is the only employee) is not a “group” health plan that is subject to Health Care Reform’s mandates. In other words, S-corporations may continue to reimburse the sole shareholder/employee for the cost of an individual health insurance policy.
Reimbursements related to Medicare and TRICARE
IRS Notice 2015-17 indicates that reimbursement of Medicare Part B and Part D premiums to employees constitutes an employer payment plan but will not violate Health Care Reform’s prohibition on annual limits and preventive care services mandate, if the employer payment plan is “integrated” with another group health plan offered by the employer. All of the following requirements must be met for this type of employer payment plan to be considered integrated:
- The employer must offer a group health plan (other than the employer payment plan) to the employee that provides minimum value and does not consist solely of excepted benefits;
- The employee participating in the employer payment plan must actually be enrolled in Medicare Parts A and B (e.g., an actively-working employee who is age 65);
- The employer payment plan is only available 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.
IRS Notice 2015-17 further provides that an arrangement in which an employer reimburses or directly pays for medical expenses of an employee who is covered by TRICARE constitutes an HRA. An HRA is a group health plan that is also subject to Health Care Reform’s prohibition on annual limits and preventive care services mandate. Similar to the relief described above, IRS Notice 2015-17 provides that an HRA that reimburses medical expenses for employees covered by TRICARE will not violate Health Care Reform’s prohibition on annual limits or preventive care services mandate, if the HRA is “integrated” with another group health plan offered by the employer. To be integrated, the HRA must satisfy requirements similar to a Medicare employer payment plan, as described above.
NOTE: Except for small employers (generally, employers with less than 20 employees), the Medicare Secondary Payer rules and TRICARE Secondary Payer rules prohibit employers from providing financial or other incentives to enroll in Medicare or TRICARE, and decline coverage under the employer’s group health plan. As a result, it appears that a Medicare employer payment plan or TRICARE HRA are only viable options for small employers that can satisfy the requirements explained above.
Increasing Compensation to Assist with the Cost of Individual Health Insurance Policies
IRS Notice 2015-17 clarifies that simply increasing an employee’s taxable compensation (i.e., a pay increase or “raise”) to assist the employee with the cost of purchasing an individual health insurance policy will not constitute an employer payment plan, if the increased compensation is not conditioned on the actual purchase of an individual health insurance policy and the employer does not endorse a particular policy, form or insurer. (Providing information about the Marketplace (i.e., the exchange) or premium tax credits is not an impermissible endorsement.) So, employers may give employees a pay increase or raise to assist them in the purchase of an individual health insurance policy. But, the employee must be permitted to use the increased compensation for any purpose.
Post-Tax Employer Payment Plans
Last, IRS Notice 2015-17 clarifies that the reimbursement to an employee for the cost of an individual health insurance policy constitutes an employer payment plan (other than an increased compensation arrangement described in the previous section), regardless of whether the reimbursement is made on a before-tax or after-tax basis. In other words, an employer payment plan that provides after-tax reimbursements is still subject to the excise tax under Section 4980D of the Code.
IRS Notice 2015-17 provides welcome relief for small employers that are currently reimbursing employees for the cost of individual health insurance policies and helpful clarification about the long-term viability of these types of arrangements. Employers that currently sponsor employer payment plans should, however, ensure that their employer payment plan is structured in a way that avoids the severe excise tax under Section 4980D of the Code.