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IRS Grants Relief for Small Employers, S Corporations, and Medicare/TRICARE Arrangements but Reiterates Excise Tax Risks of Paying Employees’ Individual Insurance Premiums

IRS Notice 2015-17 elaborates on the IRS position that, subject to narrow exceptions, an employer violates health care reform’s annual dollar limit and preventive services mandates by reimbursing or paying employee premiums for individual health insurance. (This is because such “employer payment plans” are treated as separate group health plans that impose prohibited limits but cannot be integrated with the individual policy coverage.) After articulating this position inNotice 2013-54 (see our article), the IRS has repeated it in Q&As (see our article), FAQs (see our article), and information letters (see our article) and has emphasized the severe excise tax consequences of violating these mandates.

Notice 2015-17, written in Q&A format, covers some new ground by providing relief in limited circumstances. Here are highlights:

  • Temporary Transition Relief for Non-ALEs. The IRS will not impose excise taxes otherwise assessable under Code § 4980H for employer payment plans maintained in 2014 or the first six months of 2015 (i.e., through June 30, 2015) for employers that are not “applicable large employers” (ALEs) for those periods. Employers eligible for the relief are also excused from the requirement to self-report these violations on Form 8928. The Notice relies on the definition of ALE under health care reform’s employer shared responsibility rules: With respect to a calendar year, an ALE is generally an employer that employed an average of at least 50 full-time employees, including full-time equivalent employees (FTEs), on business days during the preceding calendar year (with the option to use a six-month period during the prior calendar year to determine status for 2014 and 2015). Importantly, the Notice relief does not apply to stand-alone HRAs or other arrangements to reimburse any expenses other than insurance premiums. [EBIA Comment: By negative inference, it appears that the IRS does expect ALEs with employer payment plans to file Form 8928 for violations. Also, the Notice does not extend relief to employers with between 50 and 100 FTEs—a group that is within the definition of ALE but excused from shared responsibility penalties for 2015, if certain conditions are met; see our article.]
  • Relief Pending Guidance for Certain S Corporation Arrangements. The Notice also addresses “2% shareholder-employee healthcare arrangements,” under which a Subchapter S corporation pays for or reimburses premiums for individual health insurance coverage for a “2% shareholder” (a term of art that generally means employees who are considered to own more than 2% of the corporation’s stock), where the payment or reimbursement is included in income and the premiums are deductible by the 2% shareholder-employee under Code § 162(l) (see ourarticle for background). Pending the issuance of additional guidance on these arrangements, the Notice provides that an S corporation will not be subject toCode § 4980D or required to file Form 8928 solely as a result of having a 2% shareholder-employee health care arrangement. This relief does not apply with respect to employees who are not 2% shareholders (although the temporary relief for non-ALEs, described above, may apply). [EBIA Comment: S corporations and their advisors will want to read this relief carefully and watch for future guidance. The Notice also clarifies that a plan covering only one individual as an active employee—even if it covers other employees as that employee’s dependents—is generally not a group health plan subject to the annual limit and preventive services mandates. Notably, there is no mention of partnerships, which often maintain similar arrangements; perhaps they will be addressed in the anticipated additional guidance.]
  • Medicare Premium Reimbursement Arrangements. For purposes of complying with the annual limit and preventive services mandates, the Notice permits an employer’s reimbursement of Medicare Part B or Part D premiums to be integrated with another group health plan offered by the employer, but only if—
    • The employer offers a group health plan (other than the premium reimbursement arrangement) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;
    • The employee participating in the premium reimbursement is actually enrolled in Medicare Parts A and B;
    • Premium reimbursement is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and
    • Reimbursement is limited to Medicare Part B or Part D premiums and premiums for excepted benefits, including Medigap premiums.
  • [EBIA Comment: The Notice cautions that this kind of Medicare premium reimbursement arrangement for active employees may be subject to restrictions under other laws, such as the Medicare Secondary Payer (MSP) provisions. For example, reimbursing Medicare premiums may violate the MSP provision that prohibits employers from offering incentives for individuals entitled to Medicare not to enroll in the employer’s group health plan. Thus, this relief may be limited to employers that fall within an MSP exception, such as that available for certain small employers. If the integration criteria are not met, the arrangement would presumably violate the mandates in question, unless other relief applies. Note that retiree-only arrangements—in which not more than one active employee participates—are not subject to these mandates and do not need the relief provided in the Notice.]
  • TRICARE-Related HRAs. The Notice also permits an HRA that pays or reimburses medical expenses for employees covered by TRICARE to be integrated with another group health plan offered by the employer for purposes of complying with the annual dollar limit and preventive services mandates. (As background, HRAs generally must be integrated with a group health plan to satisfy the annual limit prohibition—see our article—and integration with TRICARE is not available because TRICARE is not a group health plan.) However, this relief is available only if—
    • The employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;
    • The employee participating in the HRA is actually enrolled in TRICARE;
    • The HRA is available only to employees who are enrolled in TRICARE; and
    • Reimbursement is limited to cost-sharing and excepted benefits, including TRICARE supplemental premiums.

    [EBIA Comment: Like the Medicare relief discussed above, this relief may have limited appeal since the TRICARE incentive prohibition rules may restrict its use primarily to small employers. And, as with the Medicare relief, if the integration criteria are not met, the arrangement would presumably violate the mandates in question, unless other relief applies.]

  • Increasing Employees’ Taxable Compensation. The Notice confirms that an employer may increase an employee’s taxable compensation, not conditioned on the purchase of health coverage, without creating an employer payment plan (or any group health plan at all). [EBIA Comment: No surprises here. But it is not particularly helpful for employers seeking to provide the same “dollars” to employees to purchase coverage elsewhere (e.g., through an Exchange), because the tax advantages of employer-provided health care are lost.]
  • After-Tax Employer Payment Plans Are Subject to Excise Tax. The Notice reiterates the IRS’s position (expressed in the FAQs cited above) that an employer’s payment or reimbursement of employees’ individual health insurance premiums is a group health plan subject to the market reforms even if the payments or reimbursements are made on an after-tax basis. [EBIA Comment: In response to some suggestions that the compliance issue could be avoided by reimbursing individual premiums with after-tax compensation, the IRS has made it very clear that an after-tax approach does not work.]

The Notice also states that the DOL and HHS have reviewed and expressed their agreement, and that additional clarifications on other aspects of employer payment plans and HRAs are expected in the near future.

EBIA Comment: The IRS has gone out of its way to emphasize, repeatedly, the compliance problems and potential excise taxes posed by paying or reimbursing employees’ individual insurance premiums (or reimbursing medical expenses other than through an integrated HRA). While the transitional relief provided here is welcome, the negative inference for employers not eligible for relief speaks volumes. The IRS expects employers with 50 or more FTEs to either discontinue employer payment plans or self-report their violations and pay excise taxes. And while the Notice refers to all of the relief as transitional, it does not specify any durational limit for the Medicare or TRICARE relief. Plan sponsors with any type of individual premium-payment arrangement (or non-integrated expense reimbursement arrangement) will want to consult with legal counsel to determine next steps. For more information, see EBIA’s Health Care Reform manual at Section V.C.4 (“Individual Health Insurance Policies May Be Treated as Group Health Plans”), EBIA’s Cafeteria Plans manual at Section X.F (“Should Participants Be Permitted to Pay for Individual Insurance Policies Under a Cafeteria Plan?”), EBIA’s Consumer-Driven Health Caremanual at Section XXV.G (“HRAs and Health Care Reform”), EBIA’s Group Health Plan Mandates manual at Sections XXIV.A.2 (“Who Must Comply With the MSP Requirements?”), XXIV.G (“MSP Requirements: Offering Certain Incentives Prohibited”), and XXVII.E (“TRICARE Incentive Prohibition”), and EBIA’s HIPAA Portability, Privacy & Security manual at Section VI.C.4 (“Individual Health Insurance Policies May Be Treated as Group Health Plans Under HIPAA”). You may also be interested in EBIA’s upcoming web seminar “Avoiding Medicare Mistakes: What Group Health Plan Sponsors and Advisors Need to Know.”

Contributing Editors: EBIA Staff.

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