February 23, 2015
On February 17, the IRS issued updated guidance on the treatment of small employer health reimbursement arrangements (also known as employer payment plans). There is good news here for small employers.
The guidance in Internal Revenue Bulletin 2015-17 (“the Notice”) specifically addresses situations where small employers (that is, employers with fewer than 50 full time equivalent employees) may be reimbursing employees for health insurance premiums, including Medicare premiums. The Notice also addresses the payment of premiums to 2% shareholders in an S corporation.
Excise Tax Transitional Relief
The Notice provides some transitional relief from the $100 per participant per day excise tax, imposed by the Affordable Care Act (ACA), on small employers who have been paying individual plan premiums on behalf of employees or reimbursing employees for these premiums, or for Medicare Part B or Part D premiums.
In order to give small employers more time to comply with ACA market reforms, relief from the excise tax is provided until June 30, 2015. Further, affected employers will not be required to file Form 8928 (Return of Certain Excise Taxes under Chapter 43 of the Internal Revenue Code).
After that date, such employers may be liable for the excise tax, and filing Form 8928 to report such tax.
Note that this relief does not extend to stand alone health reimbursement arrangements or other arrangements that reimburse employees for medical expenses other than insurance premiums. Generally, such arrangements will not meet the standards of the ACA market reforms, and will put the reimbursing employer at risk for the excise tax.
Multiple arrangements within the employer to reimburse different employees will be treated as a single arrangement for purposes of meeting market reforms and penalty relief.
S Corporation Guidance
The Notice also allows an S Corporation to continue to pay for or reimburse premiums for individual health insurance coverage for a 2% shareholder until further guidance is issued by the IRS, but in any event through the end of 2015.
The excise tax referred to above will not be asserted against employers with such a plan for its shareholders.
Further, current federal income and employment tax guidance will continue to be followed. Premiums will be considered W-2 wages at the S corporation level, with the self-employed health insurance premiums deducted by the shareholder on Form 1040.
This relief does not apply to S corporation employees who are not 2% shareholders.
Further clarification of Medicare Part B and Part D premiums is also provided in the Notice. If an employer is reimbursing, or paying directly, the Part B or Part D premiums for 2 or more active employees, such an arrangement is considered a group health plan and is subject to the market reforms.
An employer payment plan may not be integrated with Medicare to satisfy market reforms because Medicare coverage is not a group health plan. However, such an arrangement can be acceptable IF the employer (1) offers an otherwise ACA compliant group health plan to the Medicare eligible employee, (2) the employee participating in the employer plan is actually enrolled in Medicare Parts A and B, (3) the employer payment plan is only available to employees who are enrolled in Medicare Parts A and B or Part D; and (4) the employer payment plan is limited to reimbursement of Medicare Parts B or D premiums and excepted benefits, including Medigap premiums.
There is further caution in the Notice about restrictions that may be present under other laws governing such areas as Medicare secondary payer provisions. Payments under the TRICARE program are treated in a similar manner.
Increasing employee pay to cover individual policies
Where an employer increases employee compensation, but does not condition the payment of the additional compensation on the purchase of health plan coverage (or otherwise endorse a particular plan or form of coverage), the arrangement is not considered an employer payment plan. Since such an arrangement will not constitute a group health plan, it is not subject to the market reform provisions and will not be subject to the Form 8928 excise tax.
Arrangements providing medical care payments
A long standing IRS Revenue Ruling (Revenue Ruling 61-146) provides that, under certain conditions, if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, or pays such premiums directly to the insurance company, or makes payments directly for medical care, the payments are excluded from the employee’s gross income.
The Notice stresses that Revenue Ruling 61-146 can only be relied on to exclude such payments from the employee’s gross income under IRS Code Section 106, regardless of whether the employee includes the payments as wage payments on the Form W-2.
This means that regardless of the pre-tax or post-tax treatment of such payments, such arrangements are considered group health plans and must meet the standards of the Affordable Care Act market reforms, or risk being subject to the excise tax discussed earlier. Some employee benefits consulting groups have been offering such reimbursement arrangements, with associated “plan” documents, as being ACA compliant. This Notice reinforces the government’s view that such plans are not compliant and will not meet the market reform standards of the ACA.
We understand the complex nature of these rules and will be happy to discuss how they fit your individual situation in more detail. Please call our office if more guidance is desired.