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Compliance Alert - IRS Yet Again Reiterates ACA Prohibition of Individual Policy Reimbursement Arrangements

You might think of it as the second part of the third chapter of a trilogy, as has become the trend in Hollywood.  Or, to borrow from the Alien franchise, maybe it’s the fourth installment of an IRS quadrilogy.  Whatever you call this blockbuster, one thing is clear: Enforcing the ACA prohibition of reimbursing an employee’s individual policy premium is a top enforcement priority of the IRS.

On Wednesday, the IRS issued Notice 2015-17, which continues what’s becoming an epic saga of guidance on this inflammatory issue.  As discussed in our previous commentary on this topic, so-called “Employer Payment Plans,” where the employer reimburses an employee’s individual market health policy premium, are considered to be an employer-sponsored group health plan.  These reimbursement arrangements cannot comply with the ACA’s prohibition on annual or lifetime dollar limits on essential health benefits, nor the requirement to provide preventive care with no cost-sharing. 

Such employer reimbursement arrangements for individual policies violate the ACA and will trigger $100/day/employee excise taxes under Internal Revenue Code §4980D.  That’s $36,500 in excise taxes per employee, per year!

The new Notice 2015-17 is at least the fourth time the IRS has issued strong cautions of the potential dire consequences of continuing these previously common reimbursement practices.  The highlights include:

  • Transition Relief for Non-ALEs: Small employers will receive limited transition relief from the $100/day excise taxes for 2014 and through June 30 of 2015.  After June 30, 2015, such employers continuing the practice may be liable for the excise tax.  To qualify for this relief, the employer must not be an “applicable large employer” (“ALE”) under the pay or play rules.  This generally requires that the employer have fewer than 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year.
  • Medicare Reimbursement Also Prohibited: Medicare is treated in the same manner as an individual insurance policy for these purposes.  Therefore, unless the reimbursement of Medicare premiums is limited to a retiree-only plan (e.g., a retiree-only HRA), the excise taxes will apply.
  • Taxable Reimbursements Also Prohibited: Treating individual policy reimbursements as taxable will not avoid the excise taxes.
  • Increases in Employee Taxable Compensation Permitted: To assist an employee with payments of individual market coverage, employers may increase an employee’s taxable compensation without conditioning the additional compensation on the purchase of health coverage (or otherwise endorsing a particular policy, form, or issuer of health insurance). 

Consistent with our prior discussion of this issue, employers wishing to provide additional compensation to employees to assist in purchasing individual market coverage will want to ensure: a) the employee has an unrestricted right to receive those funds as cash, b) the employee is not required to use that additional cash to purchase health coverage, c) there are no health plan-related conditions on receiving the additional cash, and d) the employee is never required to substantiate the purchase of individual market coverage.

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