IRS Prohibits End-Run around ACA Rules

Employers who figure they'll pay workers upfront for health insurance on the state or federal exchanges rather than provide coverage themselves are going to run smack into the Internal Revenue Service juggernaut.

The agency made clear in its Notice 2013-54 that such maneuvers, considered employer payment plans, are tantamount to an end run around the intent of the Affordable Care Act (ACA).

In a recently updated Q&A advisory, the IRS said that these employer payment plans generally don't include arrangements where employees either can have an after-tax amount applied to health coverage or can take that amount in cash. These plans are considered group health plans subject to the market reforms under the ACA. Those reforms ban annual limits on essential health benefits and require that certain preventative measures, such as mammograms, are free.

And employers' group plans can't merge with individual coverage to satisfy the ACA provisos.

The upshot is a fine of $100 per day excise tax per employee, or $36,500 a year per employee under Section 4980D of the Internal Revenue Code.

The Department of Labor (DOL) issued Technical Release 2013-03 that is almost identical to the IRS notice, and the Department of Health and Human Services (HHS) is expected to release a similar proviso.

Andrew R. Biebl, a partner at accounting firm CliftonLarsonAllen in Minneapolis, Minn., told the New York Times late last month that the IRS ruling could upend tactics used in many businesses.

"For decades, employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs," Biebl said. "The new federal ruling eliminates many of those arrangements by imposing an unusually punitive penalty."

Here are highlights from the IRS notice about employer payment plans and reimbursement accounts. (The ruling also covers flexible spending accounts.)

  • According to Ruling 61-146, an employer who pays an employee's premiums for non-employer sponsored insurance must exclude the payments from the employee's gross income. Same goes if the payments are made to the insurer.
  • Employers can forward post-tax employee wages to an insurer at the employee's direction without establishing a group health plan, if certain DOL regulations are met.
  • The IRS, DOL and HHS will amend three regulations to allow that benefits under an employee assistance program will be considered excepted benefits—only if the program doesn't provide benefits like medical care and treatment. Excepted benefits aren't subject to the ACA's market reforms and aren't considered minimum essential coverage. Until final rules are in place and likely through the remainder of this year, the agencies will consider employee assistance plans to mean excepted benefits only if they don't provide medical care or treatment. It's up to employers to use a "reasonable, good faith interpretation" of whether their plans provide that care or treatment.
  • An employer's health reimbursement account (HRA) can't be merged with individual coverage or with the employer's individual policies. So, an HRA used to buy individual coverage violates the ACA's ban on annual dollar limits.

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