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IRS Guidance Emphasizes Health Care Reform Penalties If Employers Reimburse Employees’ Individual Insurance Premiums

May 30, 2014

Employer Health Care Arrangements (May 13, 2014)

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The IRS has issued pointed Q&A guidance reiterating the conclusion in Notice 2013-54 (see our article), that an employer is considered to establish a type of group health plan—called an “employer payment plan”—if it reimburses employees’ premiums for individual health insurance policies. (Although it does not say so explicitly, the guidance seems to have pre-tax arrangements in mind, since it notes that allowing an employee to choose between applying an after-tax amount toward health coverage or receiving that amount as cash compensation would generally not be considered an employer payment plan.) As previously explained in Notice 2013-54, because employer payment plans cannot integrate with individual insurance policies, they will violate the prohibition on annual dollar limits for essential health benefits (EHB) and the requirement to cover certain preventive services without cost-sharing. Describing the consequences of the violation, Q/A-1 emphatically notes the employer’s exposure to excise taxes of $36,500 per year (i.e., $100 per day) for each employee affected by the failures. This excise tax liability requires self-reporting on IRS Form 8928—see our article. (Adverse consequences are also possible under ERISA and the PHSA: As Q/A-2 observes, the DOL issued substantially identical guidance in Technical Release 2013-03, and HHS is expected to announce soon that it concurs.)

EBIA Comment: Notice 2013-54 staked out the IRS position that employer payment plans do not comply with health care reform because they typically do not provide first-dollar coverage for preventive services and are deemed to impose annual dollar limits up to the cost of the individual coverage purchased through them—but, crucially, they cannot integrate with underlying individual policies in order to achieve compliance. That message has met with some resistance in the benefits community, however, as some argue that arrangements reimbursing individual health insurance premiums (1) do not violate the annual dollar-limit prohibition because insurance premiums are outside the definition of EHB (and thus are exempt from the prohibition on annual dollar limits), and (2) can satisfy the preventive service mandate if designed to provide first-dollar coverage for preventive care.

The new guidance seems intended to refute this analysis (although it could have been more explicit, particularly with regard to premiums as EHB). The guidance is also consistent with informal remarks by IRS officials at the March 2014 ECFC conference, stating that employer funding of individual health insurance policies with pre-tax dollars violates the annual limit and preventive services reforms. (While the guidance reiterates that voluntary after-tax arrangements are generally permissible, employers considering such arrangements should also tread carefully and endeavor to stay within the DOL’s voluntary plans safe harbor, as referenced in Notice 2013-54 and Technical Release 2013-03.) By focusing on the magnitude of the excise taxes and the unanimity of the IRS, DOL, and HHS positions, this guidance sends a clear warning to employers still using—or contemplating—an employer payment plan. For more information, see EBIA’s Health Care Reform manual at Sections V.C (“What Is a Group Health Plan?”) and VII.B (“Excise Tax Penalties and Self-Reporting on Form 8928”); see also EBIA’s HIPAA Portability, Privacy & Security manual at Section VI.C (“What Is a Group Health Plan?”) and EBIA’s Cafeteria Plans manual at Section X.F (“Should Participants Be Permitted to Pay for Individual Insurance Policies Under a Cafeteria Plan?”).

Contributing Editors: EBIA Staff.

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