Additional guidance, plus some transition relief, has been issued from “The Departments” (Department of Labor, Department of Health and Human Services, Treasury Department and the IRS) in Notice 2015-17 that reiterates previous guidance addressing employer payment plans (EPPs) as outlined in Notice 2013-54.
Notice 2015-17 provides transition relief from the assessment of excise taxes, under IRS Code Section 4980D, for failure to satisfy market reforms in certain circumstances. The transition relief applies to employee healthcare arrangements that constitute:
• EPPs that are sponsored by employers that are not “applicable large employers (ALEs);”
• S corporation health care arrangements for 2 percent shareholder employees;
• Medicare premium reimbursement arrangements;
• TRICARE-related health reimbursement arrangements (HRAs); and
• Taxable increases to compensation to provide health care coverage.
Bottom line, EPPs that reimburse or pay for all or a portion of individual health insurance policy premiums are group health plans, must comply with the Affordable Care Act (ACA) market reforms and cannot be integrated with individual market policies. So what exactly are employer payment plans, some of the ACA market reform requirements, the meaning of integrating plans—and why should employers care?
Background
EPPs are defined as arrangements under which employers provide reimbursements or payments that are dedicated to providing medical care, such as cash reimbursements for the purchase of an individual market policy.
ACA market reforms are wide-ranging and some are downright complicated. This notice is most concerned about just a couple of health plan rules:
Health plans may no longer have an overall dollar limit (this is in the original ACA statute). Some components of a group health plan may have limits, but there is an annual limit prohibition for the overall plan. There is also a requirement that health plans provide certain cost-free preventive services (this too is in the original ACA statute). However, EPPs that have fewer than two participants who are current employees (for example, a retiree-only plan) on the first day of the plan year are not subject to the ACA market reforms and therefore do not need to satisfy the market reforms.
There are rules on how ancillary health plans such as health flexible spending accounts (FSAs) and some HRAs must be integrated with employers’ group health insurance coverage in order to adhere to ACA market reform. In other words, putting two plans together to become one that has no annual limit and provides cost-free preventive services. However, as previous notices have recited, EPPs cannot be integrated with individual market policies to satisfy market reforms.
Employers not meeting these requirements and offering EPPs would be mandated to pay an excise tax under Code Section 4980D. Excise taxes are accumulated at a rate of $100 per day per employee. That amount can be quite overwhelming for any employer but can be especially burdensome for small employers.
For an in-depth explanation of EPPs and ACA market reform, please see my columns Three New Facts About Individual Insurance Reform, Affordable Care Act Changes For Health Reimbursement Arrangements and Affordable Care Act Changes For Flexible Spending Accounts.
Notice 2015-17, which was issued February 18, 2015, answers more EPP questions and contains transition relief from excise taxes for small employers.
Transition relief for small employers: ACA excise relief under Section 4980D. In the past, small employers may have offered EPPs as described in Notice 2013-54. It was a general practice for employers to provide health insurance premium assistance for both group and individual insurance policies. However, when Notice 2013-54 was issued in September 2013 it eliminated employers’ abilities to help employees pay for individual health policies on a tax-free basis.
Because the marketplace is still transitioning and other alternatives will take time to implement, Notice 2015-17 provides relief for employers that are not considered ALEs, defined as employers who average fewer than 50 full-time employees, including full-time equivalents, on all business days during the preceding calendar year.
Transition relief from Code Section 4980D excise taxes only extends from January 1 through June 30, 2015, and only for employers who:
• were not considered ALEs for 2014 and
• are not ALEs for 2015.
After June 30, 2015, employers who are not ALEs may be liable for the excise tax. Of course, this is pending further guidance or congressional action. However, now is the time for small employers to review health care offerings and bring them into compliance.
Treatment of S corporation health care arrangements for 2 percent shareholder employees. The Departments are contemplating publication of additional guidance on ACA market reforms and whether they apply to 2 percent shareholder employee healthcare arrangements. A 2 percent shareholder employee is defined as any person who owns (or is considered as owning within the meaning of Section 318 rules of attribution) on any day during the S corporation taxable year, more than two percent of the outstanding stock.
ACA reforms do not apply to group health plans that have fewer than two participants who are current employees on the first day of the plan year. This statute can be applied to a health care reimbursement plan that has a 2 percent shareholder employee or other employee as the only participant at the beginning of any plan year.
Conversely, when an S corporation maintains more than one such arrangement, all such arrangements are treated as a single arrangement and must comply with ACA market reforms. However, if an employee is covered by a reimbursement arrangement with family coverage that includes a spouse or dependent who is also employed by an S corporation, that plan is considered to cover only the one employee.
Until such new guidance is released, or at least through the end of 2015, the excise tax will not be asserted for failure of 2 percent shareholder employee health care arrangements to comply with ACA market reforms.
As the rules stand now, a 2 percent shareholder employee is allowed both the deduction under Code Section 162(l) and the premium tax credit. Revenue Procedure 2014-41 provides guidance on computing the deduction and the credit with respect to the 2 percent shareholder.
Integration of Medicare and TRICARE-related HRAs with a group health plan. An EPP may not be integrated with Medicare coverage to satisfy ACA market reforms because Medicare is not a group health plan. However, for purposes of the annual dollar limit prohibition and the preventive services requirement, an EPP may be considered integrated if:
• Employer offers a group health plan (other than the EPP) that does not consist solely of excepted benefits and offers minimum value;
• employees in the EPP are actually enrolled in Medicare Parts A and B;
• EPP is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and
• EPP is limited to premiums for Medicare Parts B or D and excepted benefits, including Medigap premiums.
If this type of arrangement is available to active employees, it may be subject to restriction under other laws, such as the Medicare secondary payer provisions.
Similar rules apply for integrating TRICARE-related HRAs with a group health plan if:
• Employer offers group health plan (other than the HRA) that does not consist solely of excepted benefits and provides minimum value;
• employees participating in the HRA are actually enrolled in TRICARE;
• HRA is only available to employees who are enrolled in TRICARE;
• HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.
Increases in employee compensation for individual market coverage. Employers may increase employees’ taxable compensation with no condition that the funds be used for health coverage. This is not considered a group health plan and is not subject to ACA market reforms. Providing employees with information about the marketplace or premium tax credit is not an endorsement of a particular policy, form or issuer of health insurance.
Treatment of an employer payment plan as taxable. The misconceptions surrounding Revenue Ruling 61-146 are fully explained in this notice as well. Although Revenue Ruling 61-146 continues to apply, it does not address the application of ACA market reforms. As soon as the employer invokes the requirement for reimbursements or payments to be dedicated to providing medical care, such as cash reimbursements for individual policies, the payment plan becomes a group health plan. And, group health plans are subject to ACA market reforms and cannot be integrated with individual policies to satisfy market reforms.
As you can see, this notice sets the stage for additional guidance. WageWorks will keep you informed of changes and clarifications as they become available.
The information contained on this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
