Recently, the United States Department of Labor (DOL), the Internal Revenue Service (IRS) and the Department of Health and Human Services (DHHS) issued new guidance to deter implementation of certain strategies being marketed to employers that reduce costs associated with complying with the requirements of the Affordable Care Act. The Affordable Care Act (ACA), signed into law by President Obama in 2010, requires employers to offer affordable health care insurance to employees. The pivotal elements of this law went into full effect in the beginning of 2014. However, beginning on January 1, 2015, after a one-year grace period, certain employers will begin to be subject to federal penalties for noncompliant health care plans.
At the beginning of 2015, employers with 100 or more full-time employees must provide affordable health insurance to at least 70% of their employees, or be subject to certain fines and penalties. Employers with 50 to 99 full-time employees will be given until 2016 to comply with this mandate before facing federal penalties for noncompliance. Employers with fewer than 50 full-time employees are not required to provide health insurance to their employees under the law; however, if they do, the plan must be in compliance with the ACA.
As larger employers will soon face penalties for noncompliant health care plans, certain strategies that some employers had hoped to implement in order to avoid these penalties were eliminated with the recent release of new DOL, IRS, DHHS guidelines, as mentioned briefly above. One strategy that some employers were hoping to implement involved eliminating group health coverage and reimbursing full-time employees for all or part of the premiums incurred to purchase an insurance policy in the individual marketplace.
As quoted in the recent article "Feds to Employers: You Can’t Dump Sick Workers Onto Obamacare" in Bloomberg Businessweek, “The vast majority of businesses with more than 50 employees already provide insurance. But there were business owners planning to give employees raises and send them to state or federal insurance marketplaces.” According to recently released guidance issued by the DOL and IRS, employers can no longer reimburse the cost of individual health insurance purchased by the employee in the marketplace. Additionally, while it had previously been reported that employers could increase employee compensation and do everything on an after-tax basis, now the DOL has said it does not matter whether such reimbursement is pre-tax or after-tax, neither is allowed. Employers who offer such reimbursement arrangements will be subject to an excise tax of $100 per day per employee per violation.
Note: Pre-tax or after-tax reimbursements of premiums for group health insurance, such as a spouse’s plan, or COBRA continuation coverage and health reimbursement accounts (HRA) that are integrated with an employer-provided group plan offering ACA-compliant coverage , are still permitted.
In addition, these new guidelines further clarified the definition of minimum level of health care coverage that employers must provide to all full-time employees and their dependents. Throughout the past year, consultants in this field have devised strategies to take advantage of certain loopholes in the ACA, one being the clarity of the minimum level of health care coverage. Some employers were hoping to still be in compliance with the ACA “minimum value” requirement by offering employees low-cost health plans that only offered minimum preventive services and little or no hospitalization benefits or physician services. However, a recently released IRS notice provided additional guidance on the ACA “minimum value” requirement stating:
The Departments believe that plans that fail to provide substantial coverage for in-patient hospitalization services or for physician services (or for both) (referred to in this notice as Non-Hospital/Non-Physician Service Plans) do not provide the minimum value intended by the minimum value requirement and will shortly propose regulations to this effect with a view to being in a position to finalize such regulations during 2015 and make them applicable upon finalization.
As such, the IRS indicated that lower-cost compliance strategies will be subject to stricter requirements and must provide employees with substantial hospitalization and physician services.
Ultimately, these new guidelines issued by various regulatory agencies provide a broader message that the government is on the lookout for health care plans designed to minimally comply with the Affordable Care Act. Given the steep penalties for noncompliance with “minimum value” requirements and health reimbursement plans, it is important that such plans are reviewed before the grace period for federal penalties concludes at the end of this year for larger employers.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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