Many employers will choose to make available some type of reimbursement arrangement, such as an employer payment plan, instead of sponsoring health insurance. An employer payment plan is an arrangement through which an employer pays, directly or indirectly, an employee’s premiums for an individual insurance policy or Medicare Part B or D premiums. These arrangements are typically treated as deductible expenses of the company and tax-free to the employee.
According to the IRS, Department of Labor, and Health and Human Services, these arrangements, when covering two or more active employees, are considered to be “group health plans” and therefore must satisfy the Affordable Care Act’s (ACA) applicable group market reforms. However, because of the ACA’s rules on minimum essential coverage, such a plan without an actual offer of insurance cannot comply with the Affordable Care Act’s market reforms. It is sometimes possible to integrate some of these benefits with another group health plan offered by the employer for purposes of the ACA requirements.
“Group health plans” that are not in compliance with the ACA’s reforms may be subject to a $100 per day per employee excise tax. This excise tax is potentially far more expensive to employers than the often discussed “play or pay penalties” of $2,000 per employee, per year! For instance, an employer utilizing an impermissible employer payment plan for an entire year will be subject to a $36,500 excise tax per employee, and may also be liable for the $2,000 per employee pay or play penalty.
That’s right, the penalties are way bigger if you try to do something for your employees in the health care area than if you just didn’t offer them anything at all! This is in keeping with the general rule of the ACA – either provide your employees full insurance benefits, or give them nothing.
For employers that sponsor a premium reimbursement arrangement such as an employment payment plan, consider one of the following options to avoid these significant penalties:
- Eliminate the program altogether.
- Remove the program but take some of the savings and provide general (i.e. not tied to health insurance costs) raises to employees.
- Modify the plan to include an offer of health insurance coverage that would satisfies ACA requirements.
An increase to employees’ compensation, without conditioning the payment of the additional compensation on the purchase of health coverage and absent an endorsement of a particular policy, form, or issuer of health insurance, does not qualify as an employer payment plan and, thus, will not be subject to ACA reforms or the $100 per employee per day excise tax. Lastly, employers can adopt a Health Reimbursement Arrangement integrated with a group health plan that satisfies the applicable market reforms.
Temporary transition relief on this issue ran out on June 30, 2015, for most employers. Excise tax penalty relief is still available for reimbursements of individual health insurance coverage under S corporation health care arrangements, so long as it is only offered for 2%+ shareholder-employees. This relief is available at least through 2015, and until further guidance on the application of the market reforms to an S corporation 2% shareholder-employee health care arrangement is published by the IRS.
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