Because They Said So, Impermissible Health Coverage Reimbursement Arrangements
Because They Said So, Impermissible Health Coverage Reimbursement ArrangementsApril 7, 2015
Catrina Reyes, J.D., M.P.A. Policy Analyst and Compliance Manager
There is a critical topic being discussed in the world of employer-sponsored health coverage. It focuses on risky strategies some employers are taking to provide employees with health coverage and how this is impermissible in the eyes of the Treasury Department and IRS, Department of Labor (DOL), and Health and Human Services (HHS) (collectively, the Departments).
The New York Times covered this topic last June in an article entitled “Risking a Health Insurance Strategy the I.R.S. May Not Approve.” The article discusses how certain companies, such as Zane Benefits and TASC, are offering employers what is known as a ‘defined contribution plan’ for their employees. The idea is that, rather than purchasing group coverage, an employer reimburses employees for the cost of purchasing individual health coverage. It can be designed to be tax-free for the employee and excluded from payroll taxes for the employer. The apparent appeal is the savings to the employer.
It may sound like a great solution, however, these arrangements generally are considered to be group health plans and will fail to comply with the market reforms that apply to group health plans under the Affordable Care Act (ACA). In a guidance issued in 2013, Notice 2013-54, the IRS explained why these arrangements fail to comply with ACA market reforms, specifically the annual dollar limit prohibition and the preventive services requirement. Under the annual dollar limit prohibition, a group health plan may not establish any annual limit on the dollar amount of essential health benefits. The preventive services requirement provides that non-grandfathered group health plans are required to provide certain preventive services without cost-sharing. Reimbursement arrangements, employer payment plans, and defined contribution reimbursement arrangements will fail to comply with the annual dollar limit prohibition, because these arrangements/plans are considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement. These arrangements/plans will also fail to comply with the preventive services requirement, because they do not provide preventive services without cost-sharing in all instances.
Zane Benefits claims that the effect of Notice 2013-54 was to make it more cumbersome, but not impossible, for employers to give employees tax-free reimbursement of premiums for individual health insurance. Zane Benefits argues that health insurance premiums are not an essential health benefit under the ACA and thus an employer is not required to offer unlimited annual amounts for employees to purchase health insurance. Moreover, Zane Benefits asserts that the tax code has not changed. Health insurance premiums are medical care expenses under Code section 213(d)(1), and amounts received as reimbursement for these expenses can be excluded from the gross income of the employee under Code section 105.
Though Zane Benefits’ arguments may seem logical, the Departments clearly stated in Notice 2013-54 and reiterated in an FAQ, that these arrangements are impermissible when considering the application of ACA market reforms. Moreover, the intent of the ACA was to keep employer-sponsored coverage in place. It is important to note that these arrangements are themselves group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits and cost-sharing reductions on the Exchange.
An employer that maintains an impermissible arrangement will be subject to an excise tax equal to $100 per day or $36,500 a year per affected beneficiary. There is a cap of $500,000 for non-willful violations, however employers may also be subject to lawsuits by affected participants and beneficiaries.
The Treasury Department and the IRS, in conjunction with DOL and HHS, continue to provide guidance on this issue and they anticipate that further clarifications on this issue will be provided in the near future. In a more recent guidance, Notice 2015-17, transition relief from the excise tax is provided to employers that are not Applicable Large Employers* in 2014 and 2015. The Departments understand that these employers may have been offering plans that pay or reimburse employees for individual health policy premiums or Medicare Part B or Part D premiums and therefore may need additional time to obtain group health coverage or adopt a suitable alternative. As such, these employers will not be subject to the excise tax for 2014 and for January 1 through June 30, 2015. After June 30, 2015, these employers may be liable for the excise tax if they do not come into compliance.
If your clients or prospects are at risk for impermissible arrangements, Claremont can design a compliant solution.
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Find out more about impermissible health coverage reimbursement arrangements here.
*Applicable Large Employers generally are employers that employed an average of at least 50 full-time employees (including full-time equivalents) in the prior calendar year.