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Employers must report HRAs on Affordable Care Act information returns

During a September 3 payroll industry telephone conference call, an IRS representative verified that the agency’s view is that employers must report health reimbursement account (HRA) arrangements on Affordable Care Act (ACA) information returns.

Background on HRAs. A health reimbursement Account (HRA) is a type of employee benefit plan reimbursing employees for medical expenses (including medical deductibles and co-pays) not covered by other forms of insurance. Benefits are paid up to a specific dollar amount from funds provided exclusively by the employer (and not through a salary reduction or otherwise under a cafeteria plan). Balances remaining in the employee’s account at the end of a coverage period may be carried forward if the plan so provides. Amounts received by an employee under an HRA are excluded from gross income as amounts received under an accident and health plan. (Notice 2002-45, 2002-28 IRB 93)

Background on ACA information returns. Under the ACA, nonexempt individuals have the choice of maintaining “minimum essential coverage” (MEC) or paying an individual shared responsibility payment with their income tax returns. This requirement is generally referred to as the individual mandate. MEC may be health insurance coverage offered in the individual market, an employer-sponsored plan, or a government-sponsored program.

Code Sec. 6055(a) generally requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs, and other entity that provides MEC to file annual returns reporting information for each individual for whom MEC is provided. An entity filing an information return reporting MEC must furnish a written statement to each individual listed on the return that shows the information that must be reported to IRS for that individual. (Code Sec. 6055(c)(1)) The purpose of this reporting is to allow taxpayers to establish, and IRS to verify, that the taxpayers were covered by MEC and their months of enrollment during a calendar year.

Separate reporting requirements under Code Sec. 6056 apply to “applicable large employers” or ALEs (generally, for 2015, employers with at least 50 full-time employees, including full-time equivalent employees in the prior year) subject to the employer mandate—which, if certain requirements are met, imposes an annual assessable payment under Code Sec. 4980H against an employer that fails to offer affordable health coverage that provides a minimum level of coverage to its full-time employees and their dependents.

Providers of MEC are required to file Form 1094-B, Transmittal of Health Coverage Information Returns, and Form 1095-B, Health Coverage, beginning with the 2015 tax year.

At page 3, the Aug. 6, 2015 draft instructions for Forms 1094-B and 1095-B indicate, under the title “Supplemental Coverage,” that there are exceptions to this filing requirement, including for an individual in more than one plan or program provided by the same plan sponsor. However, coverage isn’t provided by the same plan sponsor if the it isn’t reported by the same reporting entity (e.g., where both an employer and an insurance company provide coverages). Therefore, an insured group health plan and a self-insured HRA covering the employees of the same employer do not qualify under this exception.

HRAs subject to ACA reporting. During the early-September payroll industry conference call, Mike O’Toole, Senior Director of Publications, Education, and Government Relations for the American Payroll Association (APA) told Donna Crisalli from IRS Chief Counsel that payroll professionals will be shocked to learn that they must report HRA coverage on ACA information returns since they already provide MEC to their employers through a third-party insurance company. (The comment was apparently a reference to the draft instructions for Forms 1094-B and 1095-B.) Crisalli sympathized with O’Toole but said that IRS never intended to exempt the reporting of HRAs on information returns.

The basic rule under Code Sec. 6055 is that providers of MEC are subject to the reporting requirements. IRS wants to make sure that it gets a report on every covered individual so the individual does not get a letter from IRS saying that he or she does not have MEC. However, Crisalli said that IRS is willing to work with employers to reduce the burden as long as it doesn’t undermine tax administration.

ALEs report the HRA information on Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, Part III (Covered Individuals), rather than Form 1095-B.

References: For return requirements for providers of minimum essential coverage, see FTC 2d/FIN ¶  S-3321; United States Tax Reporter ¶  60,554; TaxDesk ¶  812,314; TG ¶  60245.

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