The Department of Labor released last week an updated Q & A related to the reimbursement of health insurance premiums by employers and the use of Section 105 plans to possibly get around these restrictions. Although I am including the link, I will actually show the three Q & A from the DOL so there is no confusion on what is being said by the DOL and then provide some editorial comment on the answers.
Q1: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?
No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer's payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments' prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.
This answer is very clear that ANY reimbursement of health insurance payments by an employer for an employee is subject to the ACA rules and therefore are subject to possible penalties under Section 4980D of the Code. These penalties can be substantial (up to $100 per day per employee). Therefore, it is extremely important to make sure that any payment of premiums for employees is as a direct result of payments withheld from an employee's paycheck and then directly transmitted to the health insurance provider. Any gross of up wages directly related to payment of premiums may be problematic.
Additionally based on this Q & A, it is probably better for the employer not to pay any health insurance premiums (unless a qualified group plan or for only one employee employers). It appears that the DOL and the Administration is pushing all non-qualified premiums onto the exchange and those premiums are usually paid directly by the employee (and may not be reimbursed). This will increase the number of persons covered by the exchange which is the primary goal of the administration (this last part is strictly my opinion).
Q3: A vendor markets a product to employers claiming that employers can cancel their group policies, set up a Code section 105 reimbursement plan that works with health insurance brokers or agents to help employees select individual insurance policies, and allow eligible employees to access the premium tax credits for Marketplace coverage. Is this permissible?
No. The Departments have been informed that some vendors are marketing such products. However, these arrangements are problematic for several reasons. First, the arrangements described in this Q3 are themselves group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The mere fact that the employer does not get involved with an employee's individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan. DOL guidance indicates that the existence of a group health plan is based on many facts and circumstances, including the employer's involvement in the overall scheme and the absence of an unfettered right by the employee to receive the employer contributions in cash.
Second, as explained in DOL Technical Release 2013-03, IRS Notice 2013-54, and the two IRS FAQs addressing employer health care arrangements referenced earlier, such arrangements are subject to the market reform provisions of the Affordable Care Act, including the PHS Act section 2711 prohibition on annual limits and the PHS Act 2713 requirement to provide certain preventive services without cost sharing. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code.
If you are dealing with any vendor offering Section 105 plans that are attempting to make payment of health insurance premiums for more than one employee deductible by the employer and exempt from payroll taxes, be extremely careful. As you can see from this Q #3, the DOL takes a dim view of these arrangements.
One last area of concern that was not addressed by the DOL is what happens with S corporation shareholders who have health insurance premiums reimbursed. Under the self-employed health insurance deduction rules, there is a requirement for reimbursement; under the DOL Q&A, these reimbursements may run afoul of the ACA requirements. If we get further clarity on this, we will let you know.
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