IRS Issues More Guidance On Employers That Pay For Individual Health Insurance Policies for Employees – Gives Limited Relief to Small Employers
I have blogged more on the topic of how the Health Care Reform Act applies to employers that reimburse employers for individual health insurance policies than any other topic in the last year. At one point in time, as indicated in my post of June 11, 2014, The IRS Meant What It Said in Notice 2013-54 – Employers Who Pay For Individual Health Insurance Policies for Employees On a Pre-Tax Basis Face Massive Penalties, it looked like such arrangements might be permissible if done on an after-tax basis. However, as noted in my post of November 13, 2014, Agencies Come Down Hard on Various Employer Health Plans and Arrangements, the IRS clarified that was not the case in a series of FAQs it issued that same month.
On February 18, 2015 the IRS issued Notice 2015-17, addressing this topic yet again. In Q&A-5 of the Notice, IRS reiterates that both pre-tax and after-tax payment for such arrangements violates various health care reform rules.
Importantly, the Notice gives transitional relief to small employers that reimbursed individual health insurance policies during 2014 and/or the first 6 months of 2015. Small employers do not have to pay excise taxes if they violated these rules for periods before July 1, 2015. See Notice 2015-17 Q&A 1 for more information about this transitional relief.
Both small and large employers need to consider getting rid of such arrangements as quickly as possible. Large employers may need to self-report and pay excise taxes going back to January 1, 2014. The good news is that Q&A-4 of the Notice includes a rule that may be helpful in terminating such arrangements: Q&A-4 provides as follows:
Question 4 (Increases in employee compensation to assist with payments of individual market coverage): If an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance), is this arrangement an employer payment plan?
Answer 4: No. As described in Notice 2013-54, an employer payment plan is a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee, such as arrangements described in Rev. Rul. 61-146. The arrangement described in this Q&A-4 does not meet that description. In addition, because the arrangement described in this Q&A-4 generally will not constitute a group health plan, it is not subject to the market reforms. Providing employees with information about the Marketplace or the premium tax credit under Code § 36B is not endorsement of a particular policy, form, or issuer of health insurance.
Based on Q&A-4, if an employer still has an impermissible arrangement, it might terminate such arrangement and then increase the affected employee’s taxable compensation to off-set the takeaway. The key is that the employer does not in any way condition the increased compensation on the employee purchasing health insurance. There must be no strings attached to the payment.