IRS, DOL, HHS issue further guidance on certain health coverage reimbursement arrangements – including guidance on rules around employers increasing employee compensation to allow employees to purchase their own health insurance.
Under the Affordable Care Act, employer payment plans for health insurance are group health plans that will fail to comply with the market reforms. Thus, many of these payment plans subject the employers to a $36,500 per employee annual penalty. On February 18, 2015, further guidance was issued clarifying these rules and providing insight into how they are going to be applied.
An employer payment plan refers to a group health plan under which an employer reimburses an employee for some or all of the premium expenses for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee.
There has been much discussion over the past year about how these rules would apply, whether they would apply for 2014, and who they would apply to.
Here are some key points from this newly issued guidance:
- There is some transition relief for small employers (specifically those who are NOT applicable large employers (ALE’s)1 ) as they are not subject to these rules for 2014 or the first half of 2015. However, after June 30, 2015 this group of employers WILL be subject to these rules and therefore subject to the related penalties if they are providing this type of reimbursement arrangement. The IRS’s hope is that these smaller employers go out to the SHOP marketplace for healthcare coverage which would alleviate any concerns over these reimbursement arrangements. For those employers who ARE ALE’s, they are subject to these rules in 2014 and forward. The new guidance does not provide any transition relief for them.
- Another issue that has arisen relates to 2 percent shareholder-employees of an S-Corporation. The question is whether the premiums paid for one of these 2 percent shareholders violate the market reforms as with the arrangement discussed above. The IRS, DOL and HHS have not developed final guidance on how to treat these arrangements, but until such guidance is issued, no penalties will be issued for these 2 percent employee-shareholders whose premiums are paid by the corporation on their behalf.
- A reimbursement arrangement covering only a single employee is not subject to the market reforms whether or not that arrangement otherwise constitutes a group health plan.
- Last, there have been many questions related to an employer’s ability to increase an employee’s compensation, but not specifically on the condition of the payment being used to pay for healthcare insurance premiums. If the increase in compensation is not specifically tied to a particular policy, form or issuer, and is not conditioned on use for health insurance premiums, it is not subject to the market reforms and therefore would be allowed without penalty. This provides more clarity on an issue that was decidedly murky prior to this guidance and provides employers more flexibility than may have been previously thought.
1 An applicable large employer is one with 50 or more full time equivalent employees.
The guidance contains more discussion on these points and a few others and can be accessed here.
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