Reimbursements for Health Plan Premiums and the ACA: Are You In Violation?

Over the years, some employers have opted to provide their employees with reimbursement toward the cost of purchasing individual insurance plans in lieu of providing a group health plan. Many did so by establishing an Employer Payment Plan (EPP). The EPP refers to any agreement where employees treat the employer’s direct contributions (either through reimbursement or direct payment) to individual health insurance premiums as excludable from income under Section 106 of the Internal Revenue Code. In other words, such contributions were treated as tax-free.

The IRS subsequently issued Notice 2013-54 with the passing of the Affordable Care Act, classifying Employer Payment Plans as group health plans which therefore are subject to the ACA’s Market Reforms. These reforms include the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. This notice directed that employers offering Employer Payment Plans comply with these market reforms or become subject to a $100-per-day excise tax when employees obtain insurance in this manner.

Given the confusion from small employers struggling to comply with these new regulations, subsequent Department of Labor guidance has been issued, but until recently did not address reimbursements made pre-tax or post-tax. This led some to believe that the regulations only applied in pre-tax reimbursement situations; however, the newest IRS notice has completely dismissed that impression.

In the February 18, 2015 notice (IRS Notice 2015-17), the IRS specifically states that any arrangement to provide reimbursement “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.”  The IRS does, however, provide some limited transitional relief from the excise tax applicable to reimbursements that would otherwise cause the employer to violate the group plan rules of the ACA. To qualify, the employer must have fewer than 50 FTE’s (Full Time Equivalent employees), and the relief from liability will only exist 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 any employee’s individually purchased insurance.

While there was some earlier hope that the IRS would reverse its decision on the interpretation of EPP’s, that optimism has been quashed. It is highly recommended that employers offering EPP’s review their practices and ensure they do not reimburse premiums after June 30th. It is also recommended that if you have any questions or concerns about this practice, you should seek legal counsel or the advice of your tax accountant.