Employer Payment Plans Violate the ACA

Employer Payment Plans Violate the ACA- For many employers, the Affordable Care Act (“ACA”) seems like a labyrinth of rules and regulations that offer little practical guidance on how and under what circumstances employers can (or must) offer their employees group health insurance.However, employers recently got a bit of clarity from the IRS’ guidance (Notice 2015-17) regarding employer payment plans.

A payment plan is a system by which an employer pays or reimburses an employee for some or all of the premiums paid by the employee for an individual health plan secured by the employee. This had been a practical solution for small businesses who could not reasonably afford or wanted to avoid the administrative headache of sponsoring a group health plan for its employees. According to the IRS and DOL, that option is now off the table. Both the IRS and the U.S. DOL agree that such employee payment plans are “group health benefit plans,” which are required to comply with the minimum coverage requirements of the ACA. But of course, such reimbursement plans are not ACA compliant.

 As a result, employers currently offering its employees these types of reimbursement arrangements are offering a “group health plan” that does not comply with ACA requirements and can, therefore, be subject to a $100 per day excise tax for each employee. The IRS has correctly recognized the confusion stemming from this issue and has granted limited transition relief to small employers who would not ordinarily be subject to the ACA minimum coverage requirements. Small employers (less than 50 FTE’s) will not be charged any excise tax for 2014 and have until June 30, 2015, to come into compliance and avoid excise tax for the first six (6) months of 2015. Note though, absent further IRS guidance, the relief does not apply to an S corporation 2%+ shareholder-employee healthcare arrangement, where such reimbursement plans cover employees who are not 2%+ shareholders.

So what are small employers to do? The easiest option may be to simply terminate the reimbursement or payment program and send the employees out to the exchanges. However, that is not the only option. Small employers could discontinue the reimbursement plan and voluntarily replace it with an ACA compliant group health plan – even though they may not be legally required to offer a plan. Or lastly, the IRS guidance expressly states that employers may raise their employees’ taxable compensation to assist with the purchase of individual plans. But the employer cannot

condition the raise on the employees’ purchase of health coverage. In essence, employers can raise taxable earnings for all its employees to help defray health care costs, but cannot deny the raise to an employee that chooses to lease a new car with the additional money instead of purchasing individual health coverage.The prohibition on employee reimbursement plans also applies to TRICARE-related medical expense reimbursements (where 2 or more employees participate). However, the IRS guidance states that such TRICARE plans will not violate the ACA if they are integrated with another group health plan that does not consist solely of excepted benefits.

For more information about health coverage reimbursement arrangements, please visit http://www.irs.gov/pub/irs-drop/n-15-17.pdf.

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