Since the IRS and Treasury published Notice 2013-54 in September 2013, pre-tax employer reimbursement of an employee’s individual health insurance premiums has been a hot topic of conversation. Historically, many employers have reimbursed employees for individual health insurance policies in lieu of offering a group health plan (called “employer payment plans”). These type arrangements are no longer permissible and the IRS has reaffirmed its position on these types of arrangements in a short two question FAQ published on May 19, 2014.
Question 1 reads as follows:
Q1. What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?
Referencing Notice 2013-54, the IRS emphasizes that these employer payment plans are considered group health plans under the Affordable Care Act (the “ACA”) or The Patient Protection and Affordable Care Act (PPACA). As group health plans, these arrangements are subject to the PPACA market reforms, including the prohibition on annual limits and the requirement to cover preventive care without cost-sharing. Employer payment plans cannot be integrated with individual health insurance plans in order to satisfy the market reform requirements.
Importantly, this recent FAQ highlights the consequences for employers who continue to operate employer payment plans to reimburse employees for the cost of individual health insurance policies.
The consequence? A penalty of up to $100 per day per applicable employee. If that did not get your attention, the IRS also points out that the penalty could total $36,500 per year per employee. This figure does not include potential liability as a result of additional DOL enforcement of compliance with the market reforms, incorporated into the Employee Retirement Income Security Act (ERISA) by the Public Health Service Act (PHSA).
Employers currently utilizing these type arrangements or who are considering the implementation of such an employer payment plan should consult with counsel on the impact of Notice 2013-54, Technical Release 2013-03 and this FAQ to consider the risks and find an alternative benefits strategy if necessary.