In light of the Affordable Care Act, there have been no shortage of companies springing up with assertions they have solved the ACA riddle and provided a no-brainer solution for employers and their employees. Employers would be wise to be on guard against these pitches given the IRS has recently clarified at least one of these purported solutions is non-compliant with the law and would leave employers implementing it vulnerable to an ACA non-compliance fee of $100/day per employee — $36,500 per employee per year.
The approach in question is an “Employer Payment Plan.” An Employer Payment Plan is marketed as a mechanism through which employers can give employees money on a tax-free basis to be used to purchase individual health coverage while, at the same time allowing the employees to retain their eligibility for government premium subsidies through the market.
Based on IRS guidance issued September 13, 2013, Employer Payment Plans, although previously legal, are no longer allowed as a result of the market reform provisions under the ACA effective January 1, 2014.
Long story short, this means the only way employees can receive tax-free employer contributions for use in purchasing a health insurance policy is through the traditional framework of a group health plan complemented by a properly structured Section 125 cafeteria plan document. Employers can certainly provide money to employees for the purpose of purchasing individual health insurance. However, the employer contribution provided would be treated as taxable income to the employee and subject to payroll taxes for the employer, making it a much less attractive approach than it would otherwise be.
In response to continued marketing by sales organizations pitching the Employer Payment Plan approach, and as a result of a deluge of questions from employers, the IRS provided additional guidance in the form of a Questions and Answers document on May 13, 2014. The guidance provided spells out, in no uncertain terms, any employer provided funds for the purchase of health insurance must either be directed to a group health policy, within the context of a Section 125 plan, or otherwise be treated as taxable income to the employee, accordingly subject to payroll taxes.
There are many reasons for the IRS’ position with respect to employer payment plans, but certainly high on the list is the fact the government does not want individuals to have the ability to “double dip” and receive tax-favored premium reimbursement from their employer, while also retaining access to government premium subsidies. Individuals who have access to an “affordable” employer sponsored group plan that provides minimum value coverage are ineligible for government premium subsidies meaning this concern related to “double dipping” does not exist in the group market.
In light of the IRS’ amplified guidance, employers who had previously offered pre-tax reimbursement for health insurance purchased in the individual market need to adjust their policies right away to ensure that they are not subject to the non-compliance fees referenced above. Perhaps the simplest path to compliance would be to notify employees the amounts provided for the reimbursement of individual health insurance will now be treated as taxable income.
However, for employers wishing to maintain tax efficiency, transition to a group health plan is arguably easier than it has ever been. For small employers with less than 50 employees, the application process no longer includes medical questions. As such, community rated pricing makes for quick decision-making and compares competitively with the plans available in the individual market. Additionally, network access to providers and hospitals is typically greatly enhanced in a group health plan as compared to within an individual plan.
For mid-sized and large employers, maintaining a group health plan that providing “minimum essential coverage” will negate the $2,000 per employee penalty under the employer mandate, while at the same time removing the risk of being assessed the $100 a day penalty for non-compliance under the Employer Payment Plan prohibition. Better yet, providing a group health plan that provides minimum value coverage and is determined to be “affordable” under the ACA rules will negate the potential for any employer mandate noncompliance penalties.
As is generally the case, if it sounds too good to be true, it usually is. If someone comes knocking on your door pitching an “Employer Payment Plan” as the solution to all of your ACA concerns, caveat emptor.
David Bottoms is senior vice president of The Bottoms Group and a principal of TBX Benefit Partners.