As employers continue to adapt to Affordable Care Act market reforms, the IRS continues to provide guidance and clarification. In its latest notice, IRS has provided small employers who reimburse or pay certain individual health insurance policy premiums for employees with some limited transition relief from the assessment of the excise tax in Code Sec. 4980D until July 1, 2015.
The full notice answering five questions can be read here. Below are highlights from the guidance.
Transition Relief and Clarification on Individual Premium Plans
Question and answer one provides that small employers (not an Applicable Large Employer (ALE)), who employed fewer than 50 employees in the prior year, that reimbursed some or all of individual medical premiums in 2014 or the first half of 2015 are not subject to any excise tax until July 1, 2015. The IRS reiterates their position that ultimately these arrangements will be subject to tax in the future and this relief is being provided to allow small employers additional time to obtain group health coverage or adopt a suitable alternative.
The Notice is clear in question and answer five that whether a premium reimbursement is considered taxable income to the receiving employee is not at issue. Rev. Rul. 61-146, which holds that benefits paid through such arrangements are not taxable income, continues to apply. That ruling does not mean that excise taxes to the employer will not be applicable though. Nor does the IRS consider a reimbursement program acceptable simply on the basis of the premiums being paid post-tax. Even if considered taxable, a premium reimbursement program may still constitute an employer payment plan, fail the annual dollar limit and preventive services requirements, and be subject to the excise tax.
However, Q&A 4 indicates that increasing an employee’s compensation, without conditioning the payment on any purchase of health coverage (or otherwise endorsing a particular policy, form or issuer of health insurance) will not constitute an employer payment plan. It appears that in the long-term, employers wishing to assist employees with the purchase of individual premiums may need to take this relatively hands-off approach.
Treatment of S Corporations' Health Care Arrangements:
The second question and answer clarifies that a premium reimbursement plan can still cover S-Corp owners (not employees) on a post-tax basis, and S-Corp owners can still claim the deduction at year-end. Further guidance may be issued, but until that point S-Corp owners can continue to reply on IRS Notice 2008-1.
Integration of Medicare Premium Reimbursement Arrangements and TRICARE-related HRA with a Group Health Plan
In the third question and answer, the IRS reiterates previous guidance that Medicare and TRICARE are not group health plans, but offers a sort of middle road for providing an integrated plan to reimburse premiums (Medicare) or medical expenses (TRICARE) without requiring actual enrollment in the employer’s group health plan. In each case employers have to offer a minimum value group health plan, the employee must be enrolled in the other coverage (Medicare/TRICARE), and the plan must be restricted to employees with that coverage. The Notice also details restrictions on what each plan could reimburse.
The IRS anticipates that clarifications regarding other aspects of employer payment plans and HRAs will be provided in the near future. BPC will continue to keep you in the know along the way.