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Focus on Healthcare:  IRS Prohibits Employers from Reimbursing Employees for Health Insurance Premiums on a Pre-Tax Basis

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The IRS recently issued a clarifying notice reiterating that employers are prohibited from using employer payment plans to reimburse employees, on a pretax basis, for health insurance premiums that employees pay for individual health insurance policies.
July 14, 2014

The IRS recently issued a clarifying notice reiterating that employers are prohibited from using employer payment plans to reimburse employees, on a pretax basis, for health insurance premiums that employees pay for individual health insurance policies.

This would include plans that the employees purchased through a qualified health plan in the Marketplace or outside the Marketplace. As explained in IRS Notice 2013-54, these employer payment plans, mentioned above, include group health plans that are subject to the market reform provisions of the Affordable Care Act, including the group plans subject to the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.

The following list details the types of group health plans subject to this notice.
  1. Health reimbursement arrangements (HRAs)
  2. Medical expense reimbursement plans (MERPS)
  3. Cafeteria plans with a premium reimbursement account and/or a health flexible spending account
  4. Other employer healthcare and reimbursement arrangements in which the employer uses its funds to directly pay the premium for individual health insurance policies covering the employee
Additionally, the notice also reiterates that the above employer payment plans cannot be integrated with individual insurance policies purchased under the plans in order to satisfy the market reforms and other requirements of the Affordable Care Act.

Ultimately, this notice eliminates the employer’s ability (in all but limited circumstances) to use employer payment plans to help employees pay for individual health insurance policies and other out-of-pocket medical costs.

Employer payment plans and other group health arrangements failing to comply with this notice may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under IRC Sec. 4980D.  This notice applies for plan years beginning on and after January 1, 2014.

Note: The term employer payment plan generally does not include an arrangement under which an employee has the option of receiving an after-tax premium reimbursement or taking that amount in cash compensation. Thus, employers can reimburse employees for individual policies on an after-tax basis without violating market reforms.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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