IRS transition relief for small companies offering employer payment plans ends on June 30

 

Under the Patient Protection and Affordable Care Act (ACA), employers are no longer allowed to reimburse employees for individually purchased health insurance policies, because they violate the ACA’s market reforms. However, the IRS had issued transition relief for small employers that offered this type of arrangement to provide them with additional time to obtain group health coverage. Small employers should be aware that this transition relief is ending on June 30, 2015. Any small employer that still offers this type of arrangement after June 30 could be subject to an excise tax of $100 per employee per day until the violation is corrected.

Employer payment plans. Since 1961, the IRS had sanctioned the reimbursement by an employer of individually purchased health insurance policies. Rev. Rul. 61-146 permitted an employer to reimburse employees for premiums paid for individual policies without that reimbursement being included in income. However, the ACA contains certain market reforms that apply to group health plans. Two of the reforms that come into play with respect to employer payment plans are the annual dollar limit prohibition and the preventive services requirements.

EBSA Technical Release 2013-03 explained that an employer payment plan that reimburses employees for an employee’s substantiated individual insurance policy premiums will fail to comply with the ACA’s annual dollar limit prohibition because: (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement; and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

In addition, the EBSA Technical Release also indicated that an employer payment plan will fail to comply with the ACA’s preventive services requirements because: (1) an employer payment plan does not provide preventive services without cost-sharing in all instances, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

Transition relief. IRS Notice 2015-17 provided small employers with transition relief from the $100 per employee per day excise tax. The IRS said it would not assess penalties against a small employer that pays or reimburses its employees for individual health insurance premiums or Medicare Part B or Part D premiums between January 1, 2014 and June 30, 2015. For purposes of this temporary relief, a small employer is an entity that employed an average of fewer than 50 full-time employees (including full-time equivalent employees) during a period of at least six consecutive calendar months, as chosen by the employer, during 2013, for purposes of determining the employer’s status in 2014, and during 2014, for purposes of determining the employer’s status in 2015.

However, beginning June 30, these arrangements will fail to satisfy the ACA’s market reforms and may be subject to a $100 per day excise tax per applicable employee (which is $36,500 per year, per employee) under Code Sec. 4980D.

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