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IRS Information Letters Continue to Caution Against Assisting Employees With Individual Policy Arrangements

IRS Information Letters 2016-0023 (Jan. 8, 2016); 2016-0005 (Feb. 8, 2016); 2016-0021 (Feb. 22, 2016); 2016-0019 (Mar. 2, 2016)

Letter 2016-0023

Letter 2016-0005

Letter 2016-0021

Letter 2016-0019

 

The IRS has released four information letters on individual policy arrangements and related issues. These letters are provided by the IRS Office of Chief Counsel—one of them responds directly to a governmental employer, and the others respond to inquiries from members of Congress on behalf of constituents. Here are highlights:

  • Opt-Out Arrangements Permissible. Information Letter 2016-0023 describes a plan design in which a governmental employer pays additional taxable compensation to employees with other health coverage who forgo coverage under the employer’s group health plan (often referred to as “opt-out payments”). Opt-out payments do not result in a health plan subject to health care reform so long as the additional taxable compensation is unrelated to the cost of the employee’s other coverage. The letter notes that such an arrangement may have implications when calculating employee contributions for employer-sponsored coverage, based on the guidance in IRS Notice 2015-87—see our article. (When required employee contributions are not “affordable,” employees are potentially eligible for premium tax credits and applicable large employers have potential liability under Code § 4980H(b).)
  • Small Plans Exception Allows Reimbursement of Individual Policy Premiums. Information Letter 2016-0005 reiterates that an employer’s arrangement to reimburse the individual health insurance premiums of its only employee does not violate health care reform because the applicable requirements do not apply to a plan that has fewer than two participants who are active employees (sometimes referred to as the “small plans exception”).
  • Relief for Certain S Corporation Arrangements Continues to Apply. Information Letter 2016-0021 acknowledges continued reliance on IRS Notice 2015-17, which states that an S corporation will not be subject to Code § 4980D excise taxes solely as a result of having a “2% shareholder-employee health care arrangement” (see our article). Under such an arrangement, the 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); the payment or reimbursement is included in income, and the premiums are deductible by the 2% shareholder-employee under Code § 162(l). The letter also notes that an S corporation plan covering only a single employee—whether or not a 2% shareholder—would generally not be a group health plan subject to health care requirements since it would qualify for the small plans exception (discussed above).
  • Reimbursement of Individual Policy Premiums Impermissible Unless Combined With Compliant Employer Plan. Information Letter 2016-0019 reiterates the IRS’s now well-established position first articulated in IRS Notice 2013-54 (see our article) that, subject to narrow exceptions, an employer violates health care reform requirements (most notably, the prohibition against an annual dollar limit on essential health benefits) by reimbursing or paying employee premiums for individual health insurance. (This is because an employer’s reimbursement of medical expenses up to a fixed amount is a group health plan that is deemed to have an annual limit on essential health benefits.) An employer may, however, combine such an arrangement with a compliant employer group health plan (i.e., one that does not impose annual limits on essential health benefits) to determine whether the combined arrangement satisfies the annual limit (and other applicable rules). In addition, the letter notes that an employer that does not want to offer group health plan coverage may provide additional taxable compensation to its employees that the employees can use for any purpose, including the purchase of an individual health policy.

EBIA Comment: While these four information letters do not break any new ground, they highlight the compliance problems and potential excise taxes (see our article) posed by paying or reimbursing employees’ individual health insurance premiums. Letter 2016-0019 notes that although a formal opinion cannot be provided on any particular arrangement, employers should be wary of “schemes” purporting to allow reimbursement of individual policy premiums without violating health care reform. For more information, see EBIA’s Health Care Reform manual at Sections V.C.4 (“Individual Health Insurance Policies May Be Treated as Group Health Plans”) and XXVIII.E (“Assessable Payment (Penalty Tax) When Inadequate Coverage Offered to Full-Time Employees and Dependents (the “Subsection (b) Penalty”)”), 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”), and EBIA’s Cafeteria Plans manual at Section XII.D (“Additional Credits From Opting Out of Core Benefits”).

Contributing Editors: EBIA Staff.

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