The Affordable Care Act, also known as the ACA and Obamacare, continues to evolve and challenge employers that are working to comply. With a lot of the attention on the “play or pay” mandate that affects larger employers, it’s important that smaller employers are aware of provisions that may also apply to them. One such provision is discussed in IRS Notice 2015-17, which was released in February and provides transitional relief from the excise tax on small companies that offer so-called “employer payment plans”.
In the past, smaller employers that didn’t offer group health plans often used employer payment plans to help their employees purchase health insurance. These employers would pay employees a stipend they could use toward the premiums on their individual policies, or reimburse employees for a portion of the cost of their individual policies. These types of payments may be labeled as “stipend”, “insurance incentive”, or “medical” on the employees’ paychecks.
Under these plans, employers may also have paid premiums for individual health policies directly to employees’ insurance carriers, and then made payroll deductions to cover the employees’ share of the cost. If they had several employees with individual policies with a certain carrier, the carrier may offer a “list bill”, which listed each employee’s monthly premium on one invoice to the employer, who paid the full amount with one check.
Employer Payment Plans Aren’t Allowed Under the ACA
The above arrangements may trigger penalties under the ACA, as they are considered group health plans and are therefore subject to the same ACA requirements as all other group health plans. IRS Notice 2013-54 describes an employer payment plan as “a group health plan under which 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 plan covering the employee.”
According to the new guidance, even issuing reimbursements on an after-tax basis will not keep the arrangement from being viewed as a group health plan, and any such plan is therefore still subject to ACA requirements.
Employer payment plans as group health plans will fail to comply with several ACA provisions, such as prohibitions of annual limits and preventive services requirements. Consequently, employers with such arrangements may be liable for excise taxes under Code Section 4980D for failure to comply with market reforms.The tax is generally $100 per day per affected employee, which can add up quickly and result in thousands of dollars in penalties for a single employee.
IRS 2015-17 provides temporary relief from the tax through June 30, 2015, to employers that are not “applicable large employers” — those that employed at least 50 full-time employees on average during the previous calendar year. The notice also provides transition relief for some reimbursements of Medicare premiums and TRICARE costs, as well as temporary relief for certain 2-percent shareholder-employee reimbursement arrangements in S corporations.
Making Changes to Comply
Employers currently offering these reimbursements will need to communicate clearly with employees about whatever changes they plan to make. Employees may feel they’re losing compensation or a valued benefit when their employers change these arrangement, and it’s important those employers make it clear what alternatives are available.
Some employers may consider raising salaries or wages across the board to make up for the lost benefit. According to the guidance, if they don’t require employees to use the increased compensation to purchase health insurance, it’s not considered a health plan under the ACA. If the raise is contingent on purchasing health insurance, it would likely be considered a health plan and subject to ACA provisions. It’s important to consult with HR regarding any pay increases as there may be additional factors to take into consideration.
For small employers, any changes to bring plans into compliance must be made before June 30, 2015, to avoid having to pay the excise tax. Applicable large employers with these types of arrangements, whether in 2014 or today, are not covered by this relief and should take action immediately.
The above notice is intended to provide our clients with general information regarding recent updates to health care legislation. It is not intended to constitute legal or tax advice. Employers should consult their legal and/or tax advisers for guidance and to ensure compliance with applicable laws and regulations.
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