The IRS made quite a splash when it concluded in an Affordable Care Act FAQ that all employers, regardless of size, that didn’t have a group health plan, and that instead reimbursed employees for their costs to buy health insurance either on or off the individual health exchange, would be liable for $36,500 in self-assessed excise taxes.
That’s $100 per day, every day of the year, per employee, for as long as the arrangement continued. That’s a chunk of change. We’ve taken some time to sort this all out.
Health insurance reforms. The IRS calls these types of arrangements “employer payment plans,” and today they commonly take the form of health reimbursement accounts (HRAs).
Recap: In Notice 2013-54, the IRS concluded that stand-alone HRAs don’t meet market reforms, including not imposing annual limits for essential health benefits and providing free preventive care. HRAs must be integrated into a group health plan in order to avoid the $100 daily excise tax. Moreover, the IRS said that HRAs can’t be integrated into individual health policies for the same reason.
Employer payment plans that pass IRS muster. Employers have been using employer payment plans, under which employers reimburse employees for their substantiated health premiums, long before the IRS gave HRAs the nod.
In 1961, the IRS issued Revenue Ruling 61-146, in which it concluded that an employer that already had a group health plan could reimburse its employees for their share of premiums for individual health insurance, and that those payments could be considered employer contributions to an accident or health plan. The employer had three payment choices. It could:
- Reimburse employees directly for their share of the individual premiums
- Cut employees checks payable to their insurers
- Cut employees checks payable jointly to them and their insurers.
Cafeteria plan regulations, which were proposed in 2007, and on which you may rely until final regs are issued, apply the ruling in the same way, with the same result.
SIX OF ONE, HALF A DOZEN OF THE OTHER? The key difference between HRAs and employer payment plans that pass IRS muster is whether the employer already has a group plan. Whether these plans will make it into the final cafeteria plan regs, however, is anyone’s guess.