Compliance Update: Guidance and Transition Relief for Employer Payment Plans

Distributed March 5, 2015

GUIDANCE AND TRANSITION RELIEF FOR EMPLOYER PAYMENT PLANS

Recently, the Department of Labor, Department of Health and Human Services, Treasury Department, and the IRS (collectively referred to as “the Departments”) released Notice 2015-17 that provides transition relief for employer payment plans (EPPs) and reiterates previous guidance associated with these plans as outlined in Notice 2013-54.

The recent guidance provides transition relief from the assessment of excise taxes, under IRS Code Section 4980D, for failure to satisfy market reforms in certain circumstances. The transition relief applies to employee health care arrangements that constitute:

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EPPs sponsored by employers that are not "Applicable Large Employers"

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S corporation health care arrangements for 2-percent shareholder-employees

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Medicare premium reimbursement arrangements (PRAs)

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TRICARE-related health reimbursement arrangements (HRAs)

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Taxable increases to compensation to provide health care coverage

Bottom line, EPPs – those that reimburse or pay for all or a portion of individual health insurance policy premiums are group health plans – must comply with the Affordable Care Act (ACA) market reforms, and cannot be integrated with individual market policies. The following information explains employer payments plans, some of the ACA market reform requirements, the meaning of integrating plans, and why employers should care.

Background

EPPs are defined as an arrangement under which employers provide reimbursements or payments that are dedicated to providing medical care, such as cash reimbursements for the purchase of an individual market policy. While ACA market reforms are wide-ranging and complicated, Notice 2015-17 covers just a couple of health plan rules:

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Health plans may no longer have an overall dollar limit (noted in the original ACA statute). Some components of a group health plan may have limits, but there is an annual limit prohibition for the overall plan. There is also a requirement that health plans provide certain cost-free preventive services (also in the original ACA statute). However, EPPs with fewer than two participants who are current employees (for example, a retiree-only plan) on the first day of the plan year are not subject to the ACA market reforms and, therefore, do not need to satisfy the market reforms.

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There are rules on how ancillary health plans like health flexible spending accounts (FSAs) and some HRAs must be integrated with employers’ group health insurance coverage in order to adhere to ACA market reform. In other words, putting two plans together to become one that has no annual limit and provides cost-free preventive services. However, as previous notices have stated, EPPs cannot be integrated with individual market policies to satisfy market reforms.

Employers not meeting the above requirements and offering EPPs are mandated to pay an excise tax under Code Section 4980D. Excise taxes are accumulated at a rate of $100 per day per employee – an amount quite overwhelming for any employer but especially burdensome for small employers.

Please see Notice 2015-17, issued February 18, 2015, for additional details on EPPs and transition relief from excise taxes for small employers.

Transition Relief for Small Employers: ACA Excise Relief under Section 4980D

In the past, small employers may have offered EPPs as described in Notice 2013-54. It was a general practice for employers to provide health insurance premium assistance for both group and individual insurance policies. However, when Notice 2013-54 was issued in September 2013, it eliminated employers’ abilities to help employees pay for individual health policies on a tax-free basis.

Because the marketplace is still transitioning and other alternatives take time to implement, Notice 2015-17 provides relief for employers that are not considered Applicable Large Employers (ALEs). These employers are defined as those who average fewer than 50 "full-time employees" (including full-time equivalents) on all business days during the preceding calendar year.

Short-term Relief

Transition relief from Code Section 4980D excise taxes only extends from January 1 through June 30, 2015 and only for employers who were not considered ALEs for 2014 and are not ALEs for 2015.

After June 30, 2015, employers who are not ALEs may be liable for the excise tax. Although this is pending further guidance or Congressional action, it’s a good time for small employers to review health care offerings for compliance.

Treatment of S Corporation Health Care Arrangements for 2-Percent Shareholder-Employees

The Departments are contemplating publication of additional guidance on ACA market reforms and whether the rules apply to 2-percent shareholder-employees’ health care arrangements. A "2-percent shareholder-employee" is defined as any person who owns (or is considered as owning within the meaning of Section 318 rules of attribution) on any day during the S corporation taxable year, more than 2 percent of the outstanding stock.

ACA reforms do not apply to group health plans that have fewer than two participants, who are current employees, on the first day of the plan year. This statute can be applied to a health care reimbursement plan that has a 2-percent shareholder-employee or other employee as the only participant at the beginning of any plan year.

Conversely, when an S corporation maintains more than one such arrangement, all such arrangements are treated as a single arrangement and must comply with ACA market reforms. However, if an employee is covered by a reimbursement arrangement with family coverage that includes a spouse or dependent who is also employed by an S corporation, that plan is considered to cover only the one employee.

Timing of Relief

Through the end of 2015, no excise tax will be levied for failure of 2-percent shareholder-employee health care arrangements’ compliance – that is unless additional guidance is released prior to the end of the year.

As the rules stand now, a 2-percent shareholder-employee is allowed both the deduction under Code Section 162(l) and the premium tax credit. Revenue Procedure 2014-41 provides guidance on computing the deduction and the credit with respect to the 2-percent shareholder.

Integration of Medicare and TRICARE-related HRA with Group Health Plan

An EPP may not be integrated with Medicare coverage to satisfy ACA market reforms because Medicare is not a group health plan. However, for purposes of the annual dollar limit prohibition and the preventive services requirement, an EPP may be considered integrated if:

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The employer offers a group health plan (other than the EPP) that does not consist solely of excepted benefits and offers minimum value;

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Employees in the EPP are actually enrolled in Medicare Parts A and B;

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EPP is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and

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EPP is limited to premiums for Medicare Parts B or D and excepted benefits, including Medigap premiums.

If this type of arrangement is available to active employees, it may be subject to restriction under other laws such as the Medicare secondary payer provisions.

Similar rules apply for integrating TRICARE-related HRAs with a group health plan if:

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The employer offers a group health plan (other than the HRA) that does not consist solely of excepted benefits and provides minimum value;

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Employees participating in the HRA are actually enrolled in TRICARE;

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HRA is only available to employees who are enrolled in TRICARE; and

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HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.

Increases in Employee Compensations for Individual Market Coverage

Employers may increase employees' taxable compensation with no condition that the funds be used for health coverage. This is not considered a group health plan and is not subject to ACA market reforms. Providing employees with information about the Marketplace or premium tax credit is not an endorsement of a particular policy, form, or issuer of health insurance.

Treatment of an Employer Payment Plan as Taxable

The misconceptions surrounding Revenue Ruling 61-146 are fully explained in Notice 2015-17 as well. Although Revenue Ruling 61-146 continues to apply, it does not address the application of ACA market reforms. As soon as the employer invokes the requirement for reimbursements or payments to be dedicated to providing medical care, such as cash reimbursements for individual policies, the payment plan becomes a group health plan. And, group health plans are subject to ACA market reforms and cannot be integrated with individual policies to satisfy market reforms.

More Information

Notice 2015-17 seems to set the stage for even further guidance. CONEXIS will keep you informed of changes and clarifications as they become available.

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