Employer Payment Plans and Cadillac Tax “Input”
by Vita, on March 1, 2015
Employer Payment Plans
The Internal Revenue Service (IRS) recently issued Notice 2015-17. This Notice addresses employer payment or reimbursement of individual premiums in light of the requirements of the Patient Protection and Affordable Care Act (PPACA). For many years, employers were permitted to reimburse premiums paid for individual coverage on a tax-favored basis, and many smaller employers adopted this type of an arrangement instead of sponsoring a group health plan. However, these “employer payment plans” are unable to meet all of the PPACA requirements that took effect in 2014, and in a series of Notices and frequently asked questions (FAQs) the IRS has made it clear that an employer may not either directly pay premiums for individual policies or reimburse employees for individual premiums on either an after-tax or pre-tax basis.
This is the case whether payment or reimbursement is done through a health reimbursement arrangement (HRA), a Section 125 plan, a Section 105 plan, or another mechanism. Under these new rules, if the employer reimburses or directly pays premiums for individual coverage, on either a pre-tax or after-tax basis, it has created a noncompliant group health plan and the $100 per day per employee penalty would apply.
Special Grace for Small Employers
The new Notice acknowledges that this new rule may be “difficult” for smaller employers to adjust to, and therefore the Notice provides that employers that had 50 or fewer full-time or full-time equivalent employees for 2014 will not be penalized for non-compliant premium payment arrangements that were in effect during 2014. Employers that have 50 or fewer full-time or full-time equivalent employees for 2015 will not be subject to penalties for January 1, 2015, through June 30, 2015. In addition to waiving the penalty, these smaller employers will not be required to file the Form 8928 on which non-compliance is expected to be self-reported. This grace period is limited to HRAs that simply reimburse individual premiums – non-integrated HRAs that reimburse other types of expenses remain impermissible and subject to excise taxes as of the start of the 2014 plan year.
Cadillac Tax Input Requested
In other fun news, the IRS has announced that it is beginning the process of writing the regulations that will provide details on how the Cadillac tax will operate. As a reminder, beginning in 2018, plans that provide benefits that exceed the threshold of $10,200 for single coverage and $27,500 for employee and dependent coverage will be subject to an ugly excise tax. The tax is 40% of the value of coverage provided over the above threshold.
Notice 2015-16 provides some information on the types of benefits that will count toward the tax and the IRS has requested input on how best to value some of these benefits.
The types of coverage likely to be included in the taxation process include:
- Employer or employee contributions to health flexible spending accounts;
- Employer or pre-tax employee contributions to Archer medical savings accounts;
- Employer or pre-tax employee contributions to health savings accounts;
- Plans maintained for civilian employees by the federal, state, or local governments;
- On-site medical clinics (except for clinics that provide only de minimis medical care, such as first aid, immunizations, nonprescription pain killers, or work injuries to current employees without charge);
- Retiree coverage;
- Multiemployer plan coverage;
- Executive physical programs;
- Health reimbursement arrangements; and
- Specified disease or fixed indemnity coverage if the cost of coverage is excluded or deducted from taxes.
Likely not to be included are:
- Other forms of excepted benefit coverage such as accident or disability income insurance, workers’ compensation, auto-medical payment coverage, or liability coverage;
- Long-term care insurance;
- Dental and vision insurance covered by a separate policy (including both insured and self-insured coverage);
- Specified disease or indemnity insurance when payment is taxable;
- Employee after-tax contributions to Archer MSAs and to HSAs; and
- Employee assistance programs that provided limited medical benefits.
The IRS notes that valuing an HRA can be difficult. It is considering valuing HRAs based either on the amount made newly available to an employee under an HRA each year, or on the total amount spent through HRAs each year by employees divided by the number of covered employees.
Comments are due by May 15, 2015. The IRS also said it expects to request comments on other aspects of the tax. This approach means that it is not likely that proposed, much less final, regulations will be released in the near future. Vita will keep you apprised as regulations are released.