Big Tax Tab Possible For Employers Who Fund Individual Medical Coverage Via Cafeteria Plans

Making individual major medical coverage available to employees on a tax-free basis as part of an employer-sponsored arrangement may have significant adverse tax consequences for employer plan sponsors. That’s according to a recent employer alert from The Employers Council on Flexible Compensation (ECFC), which indicates it has received numerous inquiries on this issue from employer plan sponsors after the IRS issued guidance in IRS Notice 2013-54.

The IRS notice provided that pre-tax funding of individual major medical (IM) coverage for active employees through a cafeteria plan violates the Patient Protection and Affordable Care Act (ACA) and may result in a $100 per employee per day excise tax.

Not a group health plan? The ECFC alert states that some in the industry are alleging that the IRS guidance does not prohibit payment of IM policy premiums through a cafeteria plan because the cafeteria plan is not a group health plan subject to the ACA. The ECFC agrees that a cafeteria plan, in and of itself, is not a group health plan subject to the ACA. But the guidance states that any arrangement, which pays or reimburses an employee’s IM policy premiums on a pre-tax basis, would be an “employer payment plan,” and such plans are group health plans subject to the ACA. An employer payment plan violates the ACA, and employers who sponsor such arrangements would be subject to a potential excise tax of $100 per employee per day, according to the ECFC.

What to do next? The ECFC suggests that employers who are considering implementing an arrangement involving pre-tax funding of IM coverage for active employees (through a cafeteria plan or otherwise) consider the following actions:

• Seek the advice of independent legal counsel to determine the application of IRS Notice 2013-54 to the employer’s specific circumstances.

• Request a binding legal opinion from the vendor stating that no adverse tax (including excise tax) or financial consequences will result from adoption of such an arrangement.

• Request that the vendor provide indemnification for any excise taxes imposed as a result of the pre-tax funding of IM coverage.

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