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IRS Information Letters Reiterate Compliance Dangers of Assisting Employees With Individual Policy Arrangements

IRS Information Letters 2014-0037 and 2014-0039 (Sept. 22, 2014)

Letter 2014-0037

Letter 2014-0039

Visit the Health Care Reform Community on Checkpoint to join the discussion on this development (for Checkpoint subscribers to EBIA’s Health Care Reform manual).

Two IRS Information Letters—dated September 2014 but first released publicly in late December 2014—reiterate the compliance dangers of helping employees obtain individual health insurance coverage. Provided by the IRS Office of Chief Counsel, the letters respond to constituent inquiries from two members of Congress, and reference IRS positions taken in Notice 2013-54 (see our article) and later Q&As (see our article) and FAQs (see our article). Letter 2014-0037 addresses employer reimbursement of employee medical expenses with pre-tax dollars under Code § 105. Letter 2014-0039 addresses pre-tax reimbursement of employee premiums for individual health insurance policies (called an “employer payment plan” by Notice 2013-54).

The letters explain that, although health care reform does not change the tax treatment under Code §§ 105 and 106, these arrangements are group health plans that will violate health care reform’s annual dollar limit prohibition since they reimburse a fixed amount of medical expenses or individual policy premiums. The letters also state that, under Notice 2013-54, a compliant employer group health plan (i.e., one that does not impose annual limits on essential health benefits) may be combined with an arrangement reimbursing medical expenses to determine whether the combined arrangement satisfies the annual limit (and other applicable rules). However, the letters warn that Notice 2013-54 precludes combining either type of reimbursement arrangement with individual policy coverage purchased by employees. If an employer does not provide a compliant group health plan, an arrangement reimbursing medical expenses will violate the annual limit prohibition because it provides a “fixed amount” of medical expense reimbursements (Letter 2014-0037). Arrangements reimbursing individual policy premiums will violate that prohibition because they are deemed to establish a reimbursement limit equal to premiums paid (Letter 2014-0039).

EBIA Comment: Although not delineated as such, the arrangement in Letter 2014-0037 may be a health reimbursement arrangement (HRA). Notice 2013-54 provides detailed and now-familiar rules for HRA integration with other employer group health plan coverage—a theme picked up in Letter 2014-0037’s acknowledgement that a reimbursement arrangement can be “combined” with a compliant group health plan. Notice 2013-54’s position on employer payment plans met with more initial resistance in the benefits community, but the IRS, DOL, and HHS show no sign of easing their position that employer payment plans are incompatible with health care reform. Letter 2014-0039 notes that employers not providing group health plan coverage can pay employees additional compensation that can be used to purchase health coverage (provided it is not restricted to the purchase of that coverage). While this approach provides no tax benefit, it is one of the few safe courses available after Notice 2013-54. 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”) and EBIA’s Consumer-Driven Health Care manual at Section XXV.G (“HRAs and Health Care Reform”). See also 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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