The Internal Revenue Service (IRS) recently issued additional guidance (Notice 2015-17) addressing the treatment of arrangements whereby an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee (i.e. an employer payment plan). The IRS previously held (Notice 2013-54) that these arrangements constitute group health plans that will fail to satisfy the market reforms prescribed under the Affordable Care Act (ACA) and would result in the imposition of an excise tax to the employer. The IRS has not changed its conclusion with respect to the treatment of employer payment plans; however, in light of the slow progress of the SHOP Marketplace, the IRS felt it necessary to provide limited transition relief from the excise taxes for smaller employers that sponsor such arrangements.
A company that sponsored an employer payment plan in 2014 will not be subject to an excise tax with respect to such arrangement for such calendar year, provided the company was not an “applicable large employer” for the 2014 calendar year. Similarly, a company that sponsors an employer payment plan any time between January 1, 2015 and June 30, 2015 will not be subject to an excise tax with respect to such arrangement for such period if the company is not an “applicable large employer” for the 2015 calendar year. Recall, an “applicable large employer” under ACA generally is, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. For determining whether an entity was an applicable large employer for 2014 and for 2015, an employer may determine its status as an applicable large employer by reference to a period of at least six consecutive calendar months, as chosen by the employer, during the 2013 calendar year for determining such status for 2014, and during the 2014 calendar year for determining such status for 2015, as applicable (rather than by reference to the entire 2013 calendar year and the entire 2014 calendar year, as applicable).
Employers eligible for the relief are not required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans under chapter 100 of the Code, including the market reforms) solely as a result of having such arrangements for the period for which the employer is eligible for the relief. It is important to note that this relief does not extend to stand-alone health care reimbursement arrangements or other arrangements to reimburse employees for medical expenses other than insurance premiums.
Beginning July 1, 2015, this transition relief will expire. One alternative is for the employer to increase the taxable compensation paid to its employees to cover the cost of the premiums. So long as such additional compensation is not conditioned on the purchase of health insurance or the endorsement of a particular policy, form or issuer, this arrangement will not implicate the ACA mandates. Note, however, that the IRS clarified in this latest ruling that an employer cannot avoid the ACA mandates merely by treating reimbursements under an employer payment plan as taxable compensation to the employee. Such arrangement constitutes a group health plan subject to the ACA mandates without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Since these employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms, they will fail to satisfy the ACA mandates regarding the prohibition on annual limits and the requirement to provide cost-free preventive service, among other provisions.