Benefits and Compensation

IRS Offers Temporary Safe Harbor for Some Premium Reimbursement Arrangements

Small employers and certain other plan sponsors can continue to reimburse individual premiums until July 1, without the threat of extreme penalties for offering coverage that does not comply with Affordable Care Act insurance mandates, under new guidance from the Internal Revenue Service.

IRS Notice 2015-17 reiterates IRS’ previous warning, in Notice 2013-54, that giving employees money to pay for coverage in the individual market or on a health insurance exchange will not be considered to be an employer plan satisfying ACA’s employer mandate — and by violating ACA’s market reforms, would expose employers to excise taxes that could be far more expensive than offering no coverage at all.

In response to public reaction and sensitivity to the problems small and other businesses have transitioning from premium reimbursement plans to ACA-compliant coverage, the IRS notice offers transition relief from the massive excise tax, if the payment arrangement is:

  • sponsored by an employer (with 50 or fewer employees) that is not an “applicable large employer” subject to ACA’s employer mandate;
  • a health care arrangement sponsored by an S-corporation for 2-percent shareholder-employees;
  • a Medicare premium reimbursement arrangement; or
  • a TRICARE-related health reimbursement arrangement.

This stay on enforcement is good for 2014 and up to June 30, 2015. After July 1, 2015, employers previously enjoying this transition relief could be liable for the excise tax under Code Section 4980D.

In Notice 2013-54, IRS said that portraying a premium reimbursement arrangement as if it were an employer-sponsored health plan would trigger massive excise taxes for failure to satisfy market reforms, such as the requirement to keep dependents on plans until age 26 and the elimination of annual and lifetime limits on coverage. Those taxes, under Code Section 4980D, are $100 per member per day for failure to comply.

Thus, the maximum excise-tax penalty could reach $36,500 per covered life, an order of magnitude higher than the ACA no-coverage penalty ($2,000 for every full-time employee) or the inadequate- /unaffordable-coverage penalty ($3,000 for every FT employee who seeks and receives subsidies to purchase exchange coverage).

The guidance includes frequently asked questions specific to S-corporation coverage, employer reimbursement of Medicare premiums and TRICARE-related HRAs.

Taxable Status Irrelevant

Whether premium reimbursements are excluded from an employee’s gross income as allowed by Rev. Rul. 61-146, or are provided on an after-tax basis, is irrelevant for ACA liability purposes, IRS added in a separate FAQ. Either way, the arrangement is considered a group health plan subject to ACA market reforms and, because it cannot be integrated with the individual insurance for compliance purposes, violates provisions such as the ban on annual dollar limits and the requirement of cost-free preventive services.

However, if an employer simply increases compensation without conditioning the raise on buying health insurance, this is not a group health plan subject to the market reforms or related excise taxes, IRS noted.