Certain arrangements to reimburse medical expenses up to fixed amount violate ACA, IRS says

An agreement by an employer to reimburse medical expenses up to a fixed amount is a group health plan under which there is an annual limit on essential health benefits. Therefore, the plan fails to comply with the prohibition on annual limits under Public Health Service Act (PHSA) Sec. 2711, according to an IRS information letter.

Market reforms. In response to an inquiry from a constituent of Rep. Robert Hurt (R-Va.), the IRS information letter (2016-0019) explains that an employer may reimburse employees for the medical expenses of the employee and the employee’s family and exclude those amounts from the employee’s income and wages under Code Sec. 105(b). Although the Patient Protection and Affordable Care Act (ACA) did not change the tax treatment of the reimbursement for employee medical expenses, the ACA did enact certain market reforms that apply to group health plans.

Group health plans. The arrangements that the constituent described are considered to be group health plans and they must satisfy the ACA market reform rules, which are under the joint jurisdiction of the Departments of the Treasury, Labor and Health and Human Services (Departments). These rules apply to employer-provided health coverage regardless of the size of the employer and regardless of whether the employer is subject to the employer shared responsibility provision of Code Sec. 4980H. One of the Departments’ requirements for group health plans is they cannot impose an annual or lifetime dollar limit on essential health benefits under PHSA Sec. 2711.

If an employer offers a group health plan that satisfies the market reform rules by providing coverage for essential health benefits without annual limits in addition to a separate arrangement to pay for other medical expenses, the group health plan and the separate arrangement generally may be combined to determine if together the combined arrangement satisfies the market reforms.

If the employer does not offer the employee a group health plan and the employee obtains other coverage, such as when the employee is covered by an individual health insurance policy, the separate arrangement cannot be combined with that other coverage to determine if it satisfies the market reform rules for group health plans. Consequently, the arrangement to reimburse the individual health policy premiums would violate the market reforms.

Additional compensation. One option for an employer who does not want to offer coverage under a group health plan to its employees is to provide additional compensation to the employee that the employee may use for any purpose, including the purchase of an individual health policy. That amount would be taxable and the employer would not have a group health plan that fails to satisfy the market reforms, according to the letter.

SOURCE: IRS Information Letter 2016-0019, March 25, 2016 (release date).

Visit our News Library to read more news stories.