April 2, 2014 – Many small employers don’t offer employees health insurance coverage but reimburse employees for individual health insurance premiums. Until recently, such reimbursements were nontaxable. But that tax-favored treatment has changed due to the Affordable Care Act and a recent Internal Revenue Service (IRS) ruling.
According to Notice 2013-54 issued by the IRS in September 2013 – effective for plan years beginning on or after Jan. 1, 2014 – employers can no longer reimburse employees for their individual health insurance premiums, unless the reimbursements are treated as taxable wages.
In other words, the reimbursements must be subject to payroll taxes and be reported on Form W-2. Tax-favorable treatment is now reserved for employer-sponsored group health plans, which can include employer-sponsored group coverage through a health insurance exchange, now called a marketplace (the “Small Business Health Option Program” or SHOP).
Employer reimbursement of individual health insurance premiums, even premiums for individual coverage under the health insurance marketplace, cannot be considered an employer-sponsored group health plan. Employers cannot get around the new rule by allowing employees to pay for individual health insurance premiums by pretax deductions from paychecks through a section 125 cafeteria plan.
HRA Reimbursements Not Allowed Unless Integrated
The IRS notice also clarifies that general-scope health reimbursement arrangements (HRAs), also known as medical expense reimbursement plans (MERPs), through which employers reimburse employees for generally any health care expenses that are not paid by insurance, are no longer allowed, unless they are “integrated” with an employer-sponsored group health plan.
com bla dewittross Brian L. Anderson is a shareholder at DeWitt Ross & Stevens S.C. in Madison. His practice areas include employee benefits, tax law, business law, and nonprofit organizations. Reach him by com bla dewittross email or by phone at (608) 252-9340.
In general, an HRA is integrated with an employer-sponsored group health plan if the HRA is available only to employees who are enrolled in the group health plan and the HRA can be used only for reimbursement of co-payments, co-insurance, deductibles, and group health plan premiums.
A non-integrated HRA, also known as a stand-alone HRA, is a group health plan that fails to satisfy certain Affordable Care Act provisions, unless the HRA provides only “excepted benefits.” A stand-alone HRA provides only “excepted benefits” if it reimburses employees only for limited-scope vision and/or dental expenses or unless it has fewer than two participants who are current employees on the first day of the plan year (e.g., a retiree-only HRA).
Flexible Spending Arrangements
The IRS notice also clarifies that health flexible spending arrangements (FSAs) are group health plans that fail to satisfy the Affordable Care Act provisions, unless the FSA provides only “excepted benefits.” A health FSA provides only excepted benefits if it reimburses only for limited-scope vision and/or dental expenses.
A general-scope health FSA also provides only excepted benefits if:
- other employer-sponsored group health coverage is made available to the employees who are can participate in the health FSA; and
- the health FSA is funded primarily by employee salary reductions.
A health FSA is funded primarily by employee salary reductions if the maximum reimbursements under the FSA for a year do not exceed:
- two times the employee’s salary-reduction election for the year (i.e., any employer matching dollars do not exceed the employee’s salary-reduction amounts); or
- if greater, $500 plus the amount of the employee’s salary-reduction election (i.e., an employer can provide up to $500 of “seed” money that is not a matching contribution).
The new rules are complicated and could be inadvertently violated. For example, consider an employer that offers group health insurance to full-time employees and that also offers a general-scope health FSA (funded only by employee salary reductions) to all employees. Because part-time employees are eligible for the health FSA but not the group health insurance plan or other employer-sponsored health plan coverage, the health FSA does not provide only “excepted benefits.”
Violation of the new rules can be expensive. If an employer maintains a group health plan, such as an HRA or health FSA, that fails to satisfy the Affordable Care Act provisions, then the employer can be liable for a penalty tax of $100 for each day with respect to each individual to whom the failure relates.
An original version of this article was published in the March 2014 State Bar Business Law Section newsletter and is republished with permission.
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