By Linda Rowings, Chief Compliance Officer at United Benefit Advisors

On Feb­ru­ary 18, 2015, the Inter­nal Rev­enue Ser­vice (IRS) issued Notice 2015–17. This Notice address­es employ­er pay­ment or reim­burse­ment of indi­vid­ual pre­mi­ums in light of the require­ments of the Patient Pro­tec­tion and Afford­able Care Act (PPACA). For many years, employ­ers were per­mit­ted to reim­burse pre­mi­ums paid for indi­vid­ual cov­er­age on a tax-favored basis, and many small­er employ­ers adopt­ed this type of an arrange­ment instead of spon­sor­ing a group health plan. How­ev­er, these “employ­er pay­ment plans” fre­quent­ly are unable to meet all of the PPACA require­ments that took effect in 2014, and in a series of Notices and fre­quent­ly asked ques­tions (FAQs) the IRS has made it clear that an employ­er may not either direct­ly pay pre­mi­ums for indi­vid­ual poli­cies or reim­burse employ­ees for indi­vid­ual pre­mi­ums on either an after-tax or pre-tax basis. This is the case whether pay­ment or reim­burse­ment is done through a health reim­burse­ment arrange­ment handing money(HRA), a Sec­tion 125 plan, a Sec­tion 105 plan, or anoth­er mechanism.

The new Notice reit­er­ates this posi­tion. It also clear­ly states that an employ­er may increase an employee’s tax­able wages to help cov­er the cost of health cov­er­age if it choos­es not to offer cov­er­age, but the employ­er may not require an employ­ee to pur­chase health insur­ance or cer­ti­fy that he has cov­er­age in order to receive the bonus or oth­er wage increase. If the bonus or increase is specif­i­cal­ly des­ig­nat­ed as a pre­mi­um reim­burse­ment or it must be used for pre­mi­ums, this would be an imper­mis­si­ble employ­er pay­ment plan. Under these new rules, if the employ­er reim­burs­es or direct­ly pays pre­mi­ums for indi­vid­ual cov­er­age, on either a pre-tax or after-tax basis, it has cre­at­ed a non­com­pli­ant group health plan and the $100 per day per employ­ee penal­ty would apply. Reim­burse­ment and pay­ment of group health pre­mi­ums is still allowed.

Grace peri­od for employ­er pay­ment plans spon­sored by small employ­ers: The new Notice acknowl­edges that this new rule may be dif­fi­cult for small­er employ­ers to adjust to, and there­fore the Notice pro­vides that employ­ers that had 50 or few­er full-time or full-time equiv­a­lent employ­ees for 2014 will not be penal­ized for non-com­pli­ant pre­mi­um pay­ment arrange­ments that were in effect dur­ing 2014. Employ­ers that have 50 or few­er full-time or full-time equiv­a­lent employ­ees for 2015 will not be sub­ject to penal­ties for Jan­u­ary 1, 2015, through June 30, 2015. In addi­tion to waiv­ing the penal­ty, these small­er employ­ers will not be required to file the Form 8928 on which non-com­pli­ance is expect­ed to be self-report­ed. (Employ­er size is deter­mined the same way it is under the employ­er-shared respon­si­bil­i­ty rule – the num­ber of full-time and full-time equiv­a­lent employ­ees is aver­aged over the pre­ced­ing cal­en­dar year, although the employ­er may choose to aver­age lives over a six con­sec­u­tive month peri­od, rather than over the whole year if it wish­es to. The cal­en­dar year is used even for non-cal­en­dar year plans.) This grace peri­od is lim­it­ed to HRAs that sim­ply reim­burse indi­vid­ual pre­mi­ums – non-inte­grat­ed HRAs that reim­burse oth­er types of expens­es remain imper­mis­si­ble and sub­ject to excise tax­es as of the start of the 2014 plan year.

Rules for reim­burs­ing Medicare pre­mi­ums: The Notice also states that employ­er pay­ment or reim­burse­ment of Medicare Part B or D pre­mi­ums for active employ­ees will be con­sid­ered a non-com­pli­ant group health plan, sub­ject to the $100 per employ­ee per day penal­ties, unless the employ­er pay­ment plan is inte­grat­ed with a group health plan. A reim­burse­ment pro­gram will be con­sid­ered inte­grat­ed if:

  • The employ­er offered a group health plan to the employ­ee that offers min­i­mum val­ue (a plan with at least 60% actu­ar­i­al val­ue that cov­ers physi­cian and hos­pi­tal care), even if the Medicare-eli­gi­ble employ­ee declined it;
  • The employ­ee who receives pre­mi­um pay­ments is actu­al­ly enrolled in Medicare Parts A and B;
  • The pro­gram pro­vides that pre­mi­um pay­ments are only avail­able to employ­ees who are enrolled in Medicare Part A and either Part B or D; and
  • Pre­mi­um pay­ment or reim­burse­ment is only for Medicare Part B or D pre­mi­ums and except­ed ben­e­fits, includ­ing Medi­gap premiums.

This rule applies to employ­ers of all sizes. Employ­ers need to remem­ber that Medicare Sec­ondary Pay­er rules pro­hib­it an employ­er with 20 or more employ­ees from in any way incen­tiviz­ing an active employ­ee to elect Medicare instead of the group health plan. Reim­burs­ing pre­mi­ums is gen­er­al­ly con­sid­ered an imper­mis­si­ble induce­ment, and there­fore it is unlike­ly that as a prac­ti­cal mat­ter employ­ers with 20 or more employ­ees are able to reim­burse an active employ­ee for Medicare or Medi­gap pre­mi­ums. A retiree-only plan is not sub­ject to these PPACA require­ments, and there­fore reim­burs­ing Medicare pre­mi­ums for retirees gen­er­al­ly is allowed.

Although these Medicare inte­gra­tion require­ments apply to employ­ers of all sizes, small employ­ers (those with few­er than 50 employ­ees) that have been reim­burs­ing Medicare pre­mi­ums for active employ­ees in a way that does not meet these require­ments have a grace peri­od until June 30, 2015, dur­ing which no penal­ties will apply.

Rules for reim­burs­ing TRICARE expens­es: The Notice also says that employ­ers may reim­burse expens­es and pre­mi­ums for employ­ees cov­ered by TRICARE through a health reim­burse­ment arrange­ment only if the HRA is inte­grat­ed with a group health plan. The inte­gra­tion require­ments are sim­i­lar to those that apply to Medicare (that is, group health cov­er­age must be avail­able, reim­burse­ment or pay­ment must be lim­it­ed to employ­ees enrolled in TRICARE, and reim­burse­ment may only be for cost-shar­ing and except­ed ben­e­fits, includ­ing TRICARE pre­mi­ums. Pro­hi­bi­tions on incen­tiviz­ing TRI­CARE-eli­gi­ble employ­ees to enroll in TRICARE that are sim­i­lar to the Medicare Sec­ondary Pay­er rules con­tin­ue to apply.)

Rules for reim­burs­ing pre­mi­ums for 2‑percent share­hold­ers: Ques­tions have been raised about how the employ­er pay­ment plan rules apply to 2‑percent share­hold­ers in S cor­po­ra­tions. S cor­po­ra­tion share­hold­ers have spe­cif­ic require­ments for deduct­ing insur­ance pre­mi­ums, under which the reim­bursed pre­mi­um is includ­ed in the 2‑percent shareholder’s income, but is deductible by the share­hold­er. The Notice pro­vides that, until fur­ther notice and at least through 2015, an S cor­po­ra­tion may pay for, or reim­burse, indi­vid­ual pre­mi­ums for employ­ees who are 2‑percent share­hold­ers with­out caus­ing the employ­er to be treat­ed as a spon­sor of a non-com­pli­ant group health plan to which the $100 per employ­ee per day penal­ty applies. How­ev­er, an S cor­po­ra­tion can­not use a pre­mi­um pay­ment arrange­ment of this type for employ­ees who are not 2‑percent shareholders.

The Notice also clar­i­fies that when deter­min­ing if a plan cov­ers more than one employ­ee (which is what brings the PPACA require­ments into play), if only one per­son is cov­ered as the employ­ee (and the employee’s spouse is cov­ered as a depen­dent spouse and not as an employ­ee), the plan is con­sid­ered to cov­er only one employ­ee. How­ev­er, if an employ­er has mul­ti­ple pre­mi­um pay­ment arrange­ments, it will be con­sid­ered to have a sin­gle plan with mul­ti­ple par­tic­i­pants, even though one arrange­ment cov­ers a 2‑percent share­hold­er and the oth­er cov­ers a non-shareholder.

The pri­or guid­ance on employ­er pay­ment plans is here: Jan­u­ary 2013Sep­tem­ber 2013Novem­ber 2014, and Decem­ber 2014.

For infor­ma­tion on oth­er new IRS rules and com­ment­ing oppor­tu­ni­ties, down­load UBA’s lat­est PPACA Advi­sor, “Feb­ru­ary 2015 IRS Rules and Notices.”

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