Health Reimbursement Plans Not Compliant with ACA Could Mean Exorbitant Penalties
December 7, 2016, Update: Congress has just passed the 21st Century Cures Act which will, if signed by President Obama, eliminate the onerous ACA penalty for qualified small employer reimbursement plans. See the details here.
Although the law has been in place for more than two years, not everyone is yet on board. It is important that farmers, ranchers, and other small employers evaluate their health reimbursement plans to ensure that they comply with Affordable Care Act (ACA) requirements. As of January 1, 2014, a number of long-time options became improper under the ACA. Lest employers are tempted to ignore this issue, they should know that offering noncompliant plans subjects them to a possible excise tax of up to $100 per day per employee per violation.
ACA Market Reforms
Beginning January 1, 2014, the ACA implemented a number of “market reforms,” which dictate the types of coverage any valid group health plan must offer. Included in these reforms are the requirements that a group health plan impose “no annual dollar limits” on essential health benefits and that that the plan provide preventive health services (such as colonoscopies and mammograms) without any out-of-pocket costs. Small employers (fewer than 50 full-time employees) should remember that they are not required to provide health insurance to their employees under the ACA. If they do, however, the plan must be ACA-compliant.
Noncompliant Plans Can Face Big Excise Taxes
What surprises many is that these requirements apply to not only traditional group health plans but also to employer health reimbursement plans. This is because under the Internal Revenue Code, employer reimbursement plans are considered to be “group health plans.” Consequently, if an employer reimburses its employees for the cost of acquiring health insurance on the individual market, the employer has established a “group health plan” subject to ACA market reforms. Because such a plan imposes an annual dollar limit up to the cost of the individual market coverage purchased, it violates the “no annual dollar limits” requirement of the ACA. Similarly, because standalone employer payment plans do not provide preventive services without cost-sharing in all instances, they violate the preventive services requirements of the ACA.
In IRS Notice 2013-54, issued in September of 2013, the Treasury Department and the Department of Labor made clear that such plans are no longer allowed. This prohibition applies to a number of long-used standalone health care reimbursement plans that are not integrated with an ACA-compliant group health care plan. Although some exceptions apply, the ACA has made the following types of reimbursement plans unacceptable (subjecting their sponsors to an excise tax up to $100/day/employee/violation):
- Standalone §105 medical reimbursement plans (including Health Reimbursement Arrangements (HRAs))
- Employer payment or reimbursement of individual health insurance premiums (even those purchased on the ACA Marketplace)
- §125 salary-reduction plans for employee health insurance premiums
Exceptions to ACA Market Reform Requirements
There are some exceptions to these ACA requirements. Specific exemptions from the ACA market reforms are provided for:
- Plans with fewer than two participants who are current employees (known as the retiree-only exception, this exception allows employers with only one employee to continue to reimburse the cost of their health coverage or to provide an HRA to that sole employee.)
Note: This does not mean that an employer with multiple employees can choose to cover only one employee. This exception only applies when the business employs exactly one full-time employee.
- Plans that provide only ancillary benefits, including:
- Accident-only coverage
- Disability income
- Certain limited-scope dental and vision benefits
- Certain long-term care benefits
- Benefits under an employee assistance program, if the program does not provide significant benefits in the nature of medical care or treatment
- Medicare Supplement Benefits
Because of the above exceptions, HRAs reimbursing only dental or vision expenses, for example, are still allowed. Furthermore, a sole proprietor with a single employee can continue to offer an HRA to that employee without also providing a group health care plan. Add another employee, however, and the plan is noncompliant. Notice 2015-17 clarified that if an employee is covered under a reimbursement arrangement with his spouse or dependent (who are also employees), this arrangement will be considered to cover only one employee. As such, a small family business with no other employees may continue to reimburse for a family plan and fall under the “fewer than two participants who are current employees” exception to the market reforms.
The ACA does allow employers to offer HRAs if they are integrated with an employer-provided group plan offering ACA-compliant coverage. The integration rules are complex, but to offer an integrated plan, the employer must offer group health care coverage to all employees eligible for the HRA, and the employees must be covered under a compliant group health care plan (although that plan may be offered through another provider (such as the employee’s spouse)). An HRA can never be integrated with a health care plan purchased through the online Marketplace or on the individual market.
Similar to integrated HRAs, Healthcare Flexible Spending Accounts offered through a §125 cafeteria plan are acceptable under the ACA if (1) the employer also offers other group health insurance coverage and (2) the maximum benefit payable to the employee does not exceed the greater of two times the employee’s salary reduction election for the year, or $500 plus the amount of the participant's salary reduction election.
The following types of plans are still allowed under the ACA:
- Those plans exempt from market reforms as detailed above
- ACA-approved group health plans
- An HRA integrated with an ACA-approved group health plan
- A §125 FSA plan properly coupled with an employer-provided group health plan (as explained above)
- Group health plans acquired through the SHOP exchange
Impact on Employees
Small employers weighing their options should consider the impact their health care offerings will have on their employees. Remember that under the ACA, all non-exempt taxpayers must have health care coverage or pay an individual responsibility payment. Employees without access to employer-provided minimum essential coverage that is affordable can now purchase health insurance on the federal or state health care exchange (Marketplace). Those with incomes falling between 100% and 400% of poverty-level will be entitled to a premium tax credit (PTC) to offset the cost of their premiums. These PTCs can make the cost of health insurance very affordable. If an employer offers health coverage to its employees (including an excepted standalone HRA to a single employee), that offering will count as minimum essential coverage and will make their employees ineligible to purchase insurance on the health care exchanges and will prevent them from receiving PTCs. It will also, however, satisfy the requirements of the individual mandate.
If the employer decides to forego health insurance and increase wages to account for the lost benefit, the employee will pay increased FICA and income taxes and will likely receive a reduced PTC on the health care exchange because of the higher wage. In other words, there is no way for such employers to put their employees in the same position as they were before the ACA without increasing their costs.
Note: If the employer conditions the payment of the additional wage on the employee obtaining health care coverage, the employer will be found to have established a group health plan under the ACA and will be subject to the excise tax. Treating premiums as taxable compensation does not “solve” the market reforms problem. Thus, employers wishing to compensate employees for the lost benefit must give them a no-strings-attached pay raise.
S Corporations and Partnerships
For now, Notice 2015-17 has specified that S Corporations may continue to reimburse their more than 2% shareholders for the cost of their health care premiums without worry about the excise tax. This guidance provided that such arrangements will not be challenged by IRS unless and until further guidance is issued. These S Corporations may not, however, reimburse their non-2% shareholder employees under such plans. Likewise, no safety net applies to reimbursement plans for partners in partnerships. Unless and until further guidance is issued or new legislation is passed, partnerships offering health premium reimbursement plans to their partners are likely subject to the excise tax.
Excise Tax Procedure
As noted above, the ACA assesses an “excise tax” against employers (large or small) who offer insurance that is not compliant with market reforms. Specifically, the law provides that no “tax” shall be imposed on any failure during any period for which it is established to the satisfaction of the Secretary that the person otherwise liable for such “tax” did not know, and exercising reasonable diligence would not have known that such failure existed. However, once an employer discovers or could through reasonable diligence have discovered a non-willful violation of market reform requirements, the employer has a 30-day window within which to correct the problem. After 30 days, the employer must self-report the violation on IRS Form 8928 and pay a “tax” of up to $100 per day per violation per individual to whom the failure relates until the violations are resolved. If an employer can show that the violation was due to “reasonable cause” and not “willful neglect,” and the failure was corrected within 30 days, no “tax” is assessed. However, once the 30 days has passed without resolution, the “tax” begins to accrue, even for non-willful failures.
In the case of failures that were due to reasonable cause and not to willful neglect, the Secretary of the Treasury may “waive part or all of the tax imposed to the extent that the payment of the tax would be excessive relative to the failure involved.” In the case of non-willful failures by an employer offering a single plan, the “tax” is capped at 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for group health plans, or $500,000, whichever is less. When the failure is not attributable to reasonable cause, no such cap exists.
Note. Small employers providing group health insurance coverage to their employees solely through a contract with a health insurance issuer shall not be liable for the tax for any failure solely based on the health insurance coverage offered by the issuer.
Two years out, some legislators have heard from their constituents that the elimination of reimbursement plan options for small employers has been difficult. Several bills have been introduced to reinstate to small employers the ability to provide health reimbursement plans to their employees. On June 21, 2016, the Small Business Health Care Relief Act of 2016, H.R. 5447, passed the House of Representatives. The Senate did not have an opportunity to consider the bill before adjourning for the summer recess. If this bill becomes law, qualified small employer health reimbursement arrangements would be exempt from certain market reform requirements that apply to other group health plans.
Given the steep penalties accompanying ACA violations, small employers must ensure that their reimbursement plans line up with ACA requirements. Those with questions should seek professional guidance.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.