IRS Issues Limited Transition Relief From Excise Tax For Failure To Satisfy ACA Market Reforms

The IRS has issued guidance reiterating its previous conclusion that employer payment plans are group health plans that do not comply with market reforms for group health plans under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148). Included in this latest guidance is transition relief from the assessment of excise tax under Code Sec. 4980D for the failure to satisfy ACA market reforms in certain situations.

Transition relief. An employer payment plan is defined by the IRS as a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or by which it directly pays a premium for an individual health insurance policy for the employee. These arrangements are described in IRS Rev. Rul. 61-146 and IRS Notice 2013-54. An employer payment plan is one type of arrangement subject to the latest transition relief from excise tax, if the plan is sponsored by an employer that is not an Applicable Large Employer (ALE) under Code Sec. 4980H(c)(2) and IRS Reg. Secs. 54.4980H-1(a)(4) and -2.

Other employer healthcare arrangements that are eligible for the transition relief are S corporation health care arrangements for 2-percent shareholder-employees, Medicare premium reimbursement arrangements, and TRICARE-related health reimbursement arrangements (HRAs). The IRS has indicated that it plans to issue further guidance on employer payment plans and HRAs in the future, and that this latest guidance in intended to be read in conjunction with IRS Notice 2013-54.

Small employers. With regard to a small employer that offers its employees health coverage through an employer payment plan that pays or reimburses employees for individual health policy premiums or Medicare part B or Part D premiums, the IRS has stated that the employer would generally owe an excise tax under Code Sec. 4980D. However, because some employers that had previously offered such plans may need additional time to obtain group health coverage, the IRS is providing transition relief for employers that are not ALEs for these employer payment plans if, for 2014, the employers are not ALEs for 2014 and for January 1 through June 30, 2015 for employers that are not ALEs for 2015. For determining if an entity was an ALE for 2014 and 2015, an employer may determine its status as an ALE by reference to a period of at least six consecutive calendar months, as chosen by the employer, during 2013 for status in 2014 and during the 2014 calendar year for determining status for 2015.

Employers eligible for the transition relief are not required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans under chapter 100 of the Code, including the market reforms) solely as because they have employer payment plans eligible for relief during the transition period. After June 30, 2015, the above employers may be liable for the Code Sec. 4980D excise tax. The relief does not apply to stand-alone HRAs or other arrangements that reimburse employees for medical expenses other than insurance premiums. S-corporation health care arrangements. The IRS is also stating that, until further guidance is issued regarding the application of market reforms to 2-percent shareholder-employee health care arrangements, and at least through 2015, the Code Sec. 4980D excise tax will not be applied for failure to satisfy ACA market reforms with regard to these arrangements, and, pending further guidance, an S corporation with such an arrangement will not be required to file IRS Form 8928.

The IRS cautions that this guidance does not apply to reimbursements of individual health insurance coverage for employees of an S corporation who are not 2-percent shareholders. With regard to tax treatment of 2-percent shareholder-employee health care arrangements, the IRS is stating that taxpayers may rely on the existing guidance in IRS Notice 2008-1 and Rev. Proc. 2014-41.

The IRS explains that, because the ACA’s market reforms do not apply to group health plans with fewer than two participants who are current employees on the first day of the plan year, arrangements covering only a single employee are generally excepted from market reforms. However, if an S corporation maintains more than one such arrangement for different employees, they are treated as a single arrangement covering more than one employee, so that the exception does not apply.

Therefore, if both a non-2-percent shareholder employee and a 2-percent shareholder employee of an S corporation are receiving reimbursements for individual premiums, this arrangement would not be considered to be one covering fewer than two participants. An arrangement would be considered to cover only one employee, however, if an employee is covered under a reimbursement arrangement that is not 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.

Integration with Medicare. The IRS also advises that an employer payment plan may not be integrated with Medicare coverage to satisfy the ACA’s market reforms because Medicare coverage is not a group health plan. If an employer reimburses or directly pays Medicare Part B or Part D premiums for employees, that constitutes an employer payment plan, and, if it covers two or more active employees, it is a group health plan subject to market reforms.

However, the IRS also states that an employer payment plan that pays for Medicare Part B or Part D premiums is, in fact, integrated with another group health plan offered by the employer for purposes of the annual dollar limit prohibition and preventive services requirements under the following circumstances:

• the employer offers a group health plan (not an employer payment plan) that does not consist solely of excepted benefits and offers coverage providing minimum value;
• the employee participating in an employer payment plan is enrolled in Medicare Parts A and B;
• the employer payment plan is only available to employees enrolled in Medicare Part A, B, or D; and
• the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.

The above may be subject to Medicare secondary payer provisions. Also, employer payment plans, such as retiree-only plans, that have fewer than two current employee participants on the first day of the plan year are not subject to the market reforms, making integration unnecessary.

HRAs and TRICARE. Similarly, an HRA may not be integrated with TRICARE because TRICARE is not a group health plan for integration purposes. The IRS states, however, that an HRA that pays for or reimburses medical expenses for TRICARE-covered employees is integrated with another group health plan offered by the employer for purposes of the annual dollar limit prohibition and the preventive services requirements under the following circumstances:

• the employer offers a group health plan (other than the HRA) that does not consist solely of excepted benefits and offers coverage providing minimum value;
• the employee participating in the HRA is enrolled in TRICARE;
• the HRA is only available to employees enrolled in TRICARE; and
• the HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.

Employers should be aware, warns the IRS, of laws prohibiting the offering of incentives to TRICARE-eligible employees for declining employer-provided group health plan coverage. Employers may provide employees with more than one type of arrangement, such as a Medicare Part B employer payment plan and a TRICARE-related HRA, as along as each arrangement meets integration rules and other specifications is this latest guidance.

Increases in compensation. An employer payment plan is not created simply because an employer increases an employee’s compensation, even if the increase is meant to assist with payments of individual market coverage, as long as the increase is not conditioned upon the purchase of health coverage. In this situation, the increase in compensation will not constitute a group health plan subject to market reforms. Also, simply providing employees with information about the ACA Marketplace or premium tax credits is not considered by the IRS to be an endorsement of a particular policy, form, or issuer of health insurance.

Tax consequences of employer payment plans. Finally, the IRS concedes that previous guidance set forth in IRS Rev. Rul. 61-146 continues to apply. Under this guidance, in certain circumstances, the reimbursement by an employer of an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance (including employer payments directly to an insurance company) is excludable from gross income. The IRS adds a caveat, though, stating that IRS Rev. Rul. 61-146 does not address the application of market reforms, and advises employers to remember that employer reimbursements and payments dedicated to providing medical care, such as reimbursements for individual market policies, are group health plans subject to market reform provisions of the ACA. It does not matter whether the employer treats the money as pre-tax or post-tax to the employee, and these arrangements cannot be integrated with individual market policies and they will fail, at the very least, to satisfy sections 2711 and 2713 of the Public Health Service Act, pertaining to annual limit prohibitions and requirements to provide cost-free preventive services, respectively.

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