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Health Reimbursement Plans Transition Relief and Guidance for Small Employers

Posted on: February 19th, 2015 by David Snoble

The IRS is providing transition relief and guidance for employers reimbursing employees for the cost of individual health coverage. Employer group health plans must abide by a number of rules, to include the market reform rules adopted by the Affordable Care Act (ACA). Several small employers were surprised to learn last year that employee payment plans, under which they reimbursed their employees for the cost of obtaining individual health insurance, violated certain ACA rules, and that they risked a $100 per day per affected employee excise tax under Code Sec. 4980D if they were to continue using such an agreement starting in 2014. The most recent guidance offers transition relief, and clears up any misunderstanding which stemmed from previous IRS guidance.

Transition relief for 2014 and half of 2015
The Code Sec. 4980D excise tax will not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for individual health policy premiums or Medicare Part B or Part D premiums for 2014 for employers that are not Applicable Large Employers (ALEs) for 2014. Relief extends from January 1 through June 30, 2015, for employers that are not ALEs for 2015. After June 30, 2015, such employers may be held accountable for the excise tax. ALE status is determined under the employer mandate rules.

S corporations
The IRS is contemplating further guidance with respect to 2-percent employee-shareholders of S corporations. Until such guidance is issued (and in any event through the end of 2015), the excise tax under Code Sec. 4980D will not be asserted for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement, and an S corporation with a 2-percent shareholder-employee healthcare arrangement will not be required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans) solely as a result of having a 2-percent shareholder-employee healthcare arrangement. Furthermore, Notice 2008-1, I.R.B. 2008-2, 1, continues to apply regarding the tax treatment of health insurance premium reimbursement plans for 2-percent shareholders, which means the premium reimbursements paid in wages are deductible by the shareholder. Finally, if an employee (including a 2-percent shareholder-employee) is covered under a reimbursement arrangement with other-than-self-only coverage (such as family coverage), and another employee is covered by that same coverage as a spouse or dependent of the first employee, the arrangement would be considered to cover only the one employee and hence not be subject to the group health plan requirements.

After-tax arrangements
Employers may raise the compensation of their employees to assist in the purchase of individual health insurance without being subject to the group health plan requirements at all, as long as they do not condition the compensation on obtaining health insurance. However, employers that reimburse employees for the cost of individual coverage cannot escape the group health plans rules by paying the benefits as taxable compensation.

Government programs
An arrangement under which an employer reimburses or directly pays some or all of Medicare Part B or Part D premiums for employees is an employer payment plan subject to the market reforms if it covers two or more active employees. Such an arrangement must be integrated with another group plan if it is to avoid the excise tax. Such a plan is integrated with another group health plan if: (1) the employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value; (2) the employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B; (3) the employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and (4) the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.

Similarly, an arrangement under which an employer reimburses (or pays directly) some or all of medical expenses for employees covered by TRICARE constitutes an HRA, and if such an arrangement covers two or more active employees, it is a group health plan subject to the market reforms. An HRA may not be integrated with TRICARE. However, an HRA that pays for or reimburses medical expenses for employees covered by TRICARE is integrated with another group health if: (1) the employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value; (2) the employee participating in the HRA is actually enrolled in TRICARE; (3) the HRA is available only to employees who are enrolled in TRICARE; and (4) the HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.