By: Denise Smith, CPA, Senior Accountant
Do you have an arrangement with two or more of your employees to reimburse them for their health insurance premiums through individually purchased coverage, their spouse’s employer, Medicare etc.? Your ability to do so without a hefty penalty may have changed on July 1st, 2015. According to IRS guidance, “employer payment plans are group health plans that will fail to comply with the market reforms that apply to group health plans under the Affordable Care Act.”
Transitional relief provided by IRS notice 2015-17 ended on June 30th, 2015 for employers offering stand-alone Health Reimbursement Arrangements (HRA). In general, stand-alone means informal plans not associated with a formal group health insurance plan. These plans may be subject to an excise tax of $100 per-employee, per-day (up to $36,500 annually) for every employee reimbursed. S-Corporations offering a similar reimbursement arrangement to more than two-percent shareholder-employees will have to wait and see what further Treasury Department and IRS guidance brings. For S-Corporations, the excise tax will not be applied to Health Reimbursement Arrangements until that further guidance is issued.
If you are a small employer (less than 50 employees), you are not required to offer health insurance to your employees under the Affordable Care Act. You may, however, wish to help your employees to afford the cost of health coverage without taking on the high cost of a traditional health insurance plan. There are several options available as an alternative:
- Small employers may want to consider increasing employee compensation rather than reimbursing for premiums as an option to avoid the excise tax. The compensation increases cannot be conditioned on the payment of health insurance premiums, as this could be construed as a group health plan.
- One employee plans are an exception. Businesses that have only one employee may continue to utilize a reimbursement plan without triggering the excise tax.
- Reimbursements for coverage for dental, vision, long-term care, and disability coverage are allowed since they are not a part of essential health benefits.
The American Institute of CPAs has written a letter to the House Ways and Means Committee “urging Congress to enact legislation which would enable all businesses to continue the practice of providing employer payment plans to their employees, and similar arrangements to partners, more than two-percent shareholder-employees of S corporations and sole proprietors.” H&M will continue to monitor any legislation passed, which may affect the ability of businesses to utilize an HRA.
A Health Reimbursement Arrangement (HRA) that reimburses employees for health insurance premiums is subject to the excise tax in Code Section 4980D unless it provides for only one employee, reimburses only for dental, vision, etc., or is integrated with a formal group health insurance plan.
Call H&M for more information on how a Health Reimbursement Arrangement may affect your business.