In a series of notices and FAQs, the IRS has clearly enunciated its view that an employer’s reimbursement of an employee’s premiums for individual health insurance violates certain provisions of the Affordable Care Act (“ACA”). While reiterating this key point, Notice 2015-17 does grant a limited period of relief for smaller employers. Nonetheless, even those employers should be working toward a June 30 deadline to comply with these ACA constraints.
The prior guidance – and particularly Notice 2013-54 – explained why an employer’s reimbursement (or direct payment) of an employee’s individual health insurance premiums constitutes an ACA violation. As summarized in our November 10, 2014, article, the IRS views such a premium-reimbursement arrangement as a type of “group health plan” to which various ACA mandates apply. These include the prohibition of any annual or lifetime limit on coverage for essential health benefits, as well as unlimited, first-dollar coverage for preventive-care services.
By its very nature, a premium-reimbursement arrangement is unable to satisfy either of these ACA mandates. It would therefore trigger the employer excise tax imposed under Section 4980D of the Tax Code, which is $100 per day for each affected employee. This excise tax is to be self-reported and paid using IRS Form 8928.
Subsequent FAQs applied this same line of analysis to even after-tax reimbursements of employees’ individual health insurance premiums. Following those FAQs, the only option left to an employer for assisting its employees in purchasing individual health coverage are after-tax payroll deductions. The key is that an employee must have “an unfettered right to receive the employer contributions in cash.”
Notice 2015-17 recognizes that impermissible premium-reimbursement arrangements have been relatively common, particularly in the small-employer market. And although the ACA created “SHOP Marketplaces” as a place for small employers to purchase affordable health insurance, the Notice concedes that the SHOPs have been slow to get off the ground. Hence, this transition relief.
Under this relief, any employer that is not an “applicable large employer” (an “ALE”) may reimburse (or pay directly to an insurer) employee premiums for individual health insurance coverage throughout all of 2014 and the first six months of 2015. For this purpose, an ALE is defined as an employer that (including all other members of its controlled group) had 50 or more full-time employees (including any full-time equivalents) during the prior calendar year. For 2014, this determination would be made on the basis of the employer’s calendar-year 2013 workforce. For the first half of 2015, the determination would be based on 2014. In either event, an employer may take advantage of prior guidance allowing this test to be based on any consecutive 6-month period during the applicable look-back year.
Although ALEs with 50 to 99 full-time employees (including full-time equivalents) may rely on a different transition rule to avoid any ACA “play-or-pay” penalties during 2015, there is no similar relief in Notice 2015-17. Thus, such a “mid-sized employer” may not take advantage of this transition relief for employer reimbursements of individual health insurance premiums.
Note that this transition relief is limited not only in duration (i.e., only through June 30, 2015), but also in scope. It applies only to a small employer’s reimbursement (or direct payment) of health premiums – including premiums under Medicare Part B or D. It does not allow for stand-alone health reimbursement arrangements (“HRAs”) that reimburse other medical expenses. As explained in our articles of January 28, 2013, and October 1, 2013, such an HRA must either be “integrated” with an employer group health plan, limited to the reimbursement of former employees’ expenses, or “frozen” to new contributions as of December 31, 2013.
Small employers now have just over four months in which to wind down any impermissible premium-reimbursement arrangement. In its place, they may wish to adopt a plan through a SHOP Marketplace. Although individuals may enroll through a Marketplace during only annual or special enrollment periods, there is no such limitation on an employer’s ability to adopt a plan through a SHOP.