United States: Employer Paid Individual Health Insurance Policies Create The Potential For Significant Penalties, But Limited Relief Is Available

Despite guidance from the Internal Revenue Service ("IRS"), the Department of Labor ("DOL") and the Department of Health and Human Services ("HHS") indicating the prohibition of the practice under the Affordable Care Act ("ACA"), some employers continue to reimburse employees for health insurance premiums. This practice could lead to thousands of dollars in penalties.

Notice 2015-17 is the IRS' most recent guidance on such arrangements, reaching the same conclusions. It also, however, provides welcome penalty relief for certain employers.

Background

Due to the high cost of group health coverage, some employers prefer to offer what has come to be known as "Employee Payment Plans" ("EPPs"). Through these plans, employers encourage employees to purchase their own individual health insurance and then reimburse them for some or all of the cost of the premiums.

This practice has long-standing precedent. In 1961, the IRS released Revenue Ruling 61-146, holding that premium subsidies could be provided to employees on a pre-tax basis so long as either the employer paid the insurance company directly or reimbursed the employee for the cost of the coverage. The payments could be excluded from the employee's gross income under Internal Revenue Code ("Code") Sections 105 and 106.

The ACA Market Reforms and Notice 2013-54

The enactment of the ACA did not directly prohibit EPPs, but enacted market reforms that apply to "group health plans." In 2013, the IRS Issued Notice 2013-54, taking the position that an EPP that reimburses employees for individual insurance policy premiums is a "group health plan" and must satisfy these market reforms.

Among other things, the market reforms in the ACA establish that group health plans may not contain an annual limit on the amount of benefits for an individual. Notice 2013-54 clarifies that an EPP is considered to impose an annual limit up to the cost of the coverage purchased.

The impact of violating an ACA market reform is considerable. Code Section 4980D(b)(1) provides for a $100 per day, per employee penalty (subject to certain caps with respect to unintentional failures). ACA violations are self-reported by an employer on IRS Form 8928.

The Impact on S Corporations

S corporations are particularly affected by this change. The Code looks at ownership percentages of S corporation shareholders (similar to the treatment of partners in a partnership) for the treatment of certain fringe benefits. A more than 2-percent owner of an S corporation is not entitled to receive tax-free fringe benefits.

Therefore, when an S corporation would reimburse a more than 2-percent owner for premiums or pay them on the owner's behalf, the owner could not exclude that amount from taxable income. Instead, as explained in IRS Notice 2008-1, the owner would include those amounts in taxable compensation but deduct the premiums as a "self-employed health insurance deduction." The S corporation could deduct the reimbursements as compensation.

Now, such arrangements are in contravention to the ACA market reforms and can trigger the penalty discussed above.

DOL FAQ Part XXII

In November 2014, the DOL, HHS and the IRS jointly released FAQ Part XXII on the Affordable Care Act, further limiting the ability for employers to reimburse employees for premium payments. Q&A #1 states that an EPP violates ACA market reforms whether the payment is treated as pre-tax or post-tax to the employee.

Transitional Relief for Small Employers and S Corporations under Notice 2015-17

Transitional relief applies to some plans other than those sponsored by an Applicable Large Employer ("ALEs") under Notice 2015-17. An ALE, for a particular calendar year, has an average of 50 or more full-time employees during the preceding calendar year.

If an employer was not an ALE for 2014, no Code Section 4980D tax is assessed in 2014 for failure to satisfy ACA's market reforms that would otherwise arise from having offered an EPP used to pay or reimburse employees for individual health insruance premiums or Medicare Part B or Part D premiums. If an employer is not an ALE for 2015, this exemption from the Code Section 4980D tax is extended through the period of January 1 through June 30, 2015.

Additionally, until further guidance is issued (but at least through the end of 2015) employers will not be assessed the Code Section 4980D tax for failure to satisfy the ACA's market reforms that would otherwise arise from having offered an EPP that is an S corporation healthcare arrangement for 2% shareholder-employees.

Special Rules Regarding Medicare/TRICARE Reimbursement under Notice 2015-17

Notice 2015-17 confirms that arrangements that reimburse employees for Medicare or TRICARE premiums may be group health plans subject to the ACA market reforms. However, so long as employees enrolled in Medicare Part B, Part D or TRICARE are offered employer health plan coverage that is of minimum value and not solely excepted benefits, they can also be offered a premium reimbursement arrangement to assist them with the payment of the Medicare or TRICARE premiums. Employers should remain cautious, however, about offering financial incentives for employees to obtain Medicare or TRICARE coverage because of prohibitions on that practice in the Medicare Secondary Payer Act.

Solutions for Other Employers That Have Violated ACA's Market Reforms

Under Code Section 4980D, the IRS may waive part of or the entire tax for a failure due to "reasonable cause" and not "willful neglect." The IRS has not defined the terms "reasonable cause" or "willful neglect" in the context of the Code Section 4980D tax. Generally under the Code, reasonable cause can describe a scenario where a compliance failure occurs notwithstanding the exercise of ordinary business care and prudence. Willful neglect, on the other hand, generally implies a conscious, intentional failure, or reckless indifference to the market reform at issue.

Therefore, it may be wise to report the failure to the IRS on Form 8928, along with an explanation of why the failure occurred. If the error is not self-reported and is discovered by the IRS, the penalty rises to a minimum of $2,500 per individual affected by a violation.

Solutions for the Future

Small employers with 50 or fewer employees can provide a group health plan through the Small Business Health Options Program ("SHOP") Marketplace Exchange. These plans can be used in conjunction with a Code Section 125 cafeteria plan to permit an employee's share of individual premiums to be offered on a pre-tax basis.

For larger employers, permissible solutions include either establishing a group health plan that meets the market reform requirements or stopping reimbursements. Additionally, it may be possible to offer employees additional compensation without any requirement that the employee use the amount to cover insurance premiums, a practice that the IRS sanctions in Notice 2015-17.

Keep in mind, however, that the ACA's employer mandate has already come into effect for employers with more than 100 full-time (and full-time equivalent) employees and will apply to those with 50 or more next year. In 2015, employers will need to offer minimum essential coverage to at least 70% of their full-time employees to avoid an employer level penalty under Code Section 4980H, and to 95% of full-time employees by 2016.

Finally, Notice 2015-17 makes it clear that the market reform rules do not apply to EPPs that only have one participating employee. When considering the possibility of operating a one-employee EPP for employers with more than one employee, however, the nondiscrimination rules under Code Section 105(h) should be carefully reviewed.

Dickinson Wright's employee benefits practice team will continue to follow developments in this area. The IRS anticipates releasing additional guidance in the future. Please contact the author of this Alert, any member of the employee benefits practice team or your regular Dickinson Wright attorney for guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Deborah Grace
Jordan Schreier
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions