The Internal Revenue Service (“IRS”) recently posted on its website, through a short two question and answer (“Q&A”) format to caution to employers who are subject to the employer shared responsibility provision set forth in the Affordable Care Act (“ACA”). The IRS cautions these employers that they may be subject to penalties if they do not establish a health insurance plan for its employees and, subsequently, reimburse those employees for the premiums they paid for health insurance. This includes premiums paid for health insurance purchased within or outside the state marketplaces (exchanges). This strategy, commonly referred to as “dumping”, was proposed by some employers as a cost effective way to shift rising health costs to the employees. The IRS has concluded that these arrangements are deemed to be group health plans subject to the new market reform provisions under the ACA and are also subject to the penalties for failure to meet those provisions.
The U.S. Treasury Department (“Department”), on February 10th, issued final regulations implementing the employer shared responsibility provisions of the ACA. The final regulations provide transitional relief for large and mid-sized employers and address several other areas related to the employer shared responsibility provision of the ACA.
As outlined in a previous alert, under the ACA and Internal Revenue Code (“IRC”) §4980H, an applicable large employer that, for a calendar month, fails to offer to at least 95% of its full-time employees health coverage that is both affordable and provides minimum value may be subject to a penalty if any of its full-time employees for that month purchase a qualified health plan through a state-based marketplace through the use of a premium tax credit or subsidy. An applicable large employer is defined as one that employed, during the preceding calendar year, an average of at least 50 full-time employees, including full-time equivalents.
Coverage under an employer-sponsored plan is deemed to be affordable for an employee as long as the employee’s required contribution toward the cost of single only health coverage does not exceed 9.5% of their household income. To determine household income, several safe harbors exist. For example, an applicable large employer can use an employee’s Form W-2, Box 1 wages as household income. Other safe harbors include hourly rates paid to employees or Federal poverty level. Coverage under an employer-sponsored plan provides minimum value as long as the plan’s share of the total allowed costs of benefits provided under the plan is at least 60% of those costs. A health plan meets this standard if it is designed to pay at least 60% of the total cost of medical services for a standard population.
The employer shared responsibility provision was originally set to take effect on January 1, 2014. Last summer, the IRS issued Notice 2013-45 delaying the effective date of this provision to January 1, 2015. Please refer to our previous alert dated July 26, 2013. The release of these final regulations provides further transitional relief for certain employers.
Under IRS Notice 2013-54, Application of Market Reform and Other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain Other Employer Healthcare Arrangements, which was issued in September, 2013, the IRS identifies plans in which an employer reimburses an employee for some or all of their health premiums as employer payment plans. Treatment of employer payment plans under IRS Revenue Ruling 61-146, 1961-2 CB 25, treated these premiums as nontaxable to the employee under IRC §106 whether paid directly or to the employee. Notice 2013-54 states that an employer payment plan does not include an employer-sponsored arrangement under which an employee may have an after-tax amount to be applied towards health coverage or take that amount in cash compensation. These plans cannot be integrated with individual policies to satisfy market reform requirements.
If the employers arrangement fails to satisfy the market reforms under IRC §4980D, the employer may be subject to a $100 per day excise tax per applicable employee. The IRS highlights that this could total $36,500 per year per employee. There are also potential additional penalties that may be assessed by the Department of Labor (“DOL”) in enforcing compliance with market reforms.
In addition to Notice 2013-54, DOL has issued a similar notice entitled “DOL Technical Release 2013-03” and plans to issue additional guidance and FAQs in conformity with Notice 2013-54. Employers currently using this strategy or who are considering implementation should consider the impact of Notice 2013-54, Technical Release 2013-03 and the IRS Q&A.