Employers - Be Careful With Medical Reimbursement Plans

I am reading a notice from the Department of Labor titled “FAQs about Affordable Care Act Implementation (Part XXII)."

This will never make it as summer reading while on a beach.

And the DOL pretty much says what many practitioners concluded last year when the IRS issued Notice 2013-54, addressing employer reimbursement arrangements and individual health insurance policies acquired on an exchange.

COMMENT: “Exchange” and “marketplace” are the same.

The government does NOT like them.

Let’s clarify what we are talking about. There used to be a very common arrangement whereby an employer would pay your health insurance, reimburse your medical expenses, or a combination of the two, with no tax to you. These plans had several names, including health reimbursement plans or Section 105 plans. The practice had been around since before I was born.

Introduce ObamaCare. Say that someone goes on the exchange and buys an individual policy. Let’s take one more step and say that someone qualifies for a government subsidy on that individual policy.

Step One: You have someone getting money (in the form of the subsidy) from the government.

Say that person’s employer has a health reimbursement plan. The plan reimburses medical expenses, including insurance, up to some dollar amount – say $2,500.

Step Two: That person submits his/her government-subsidized Obamacare policy to the employer for reimbursement, up to $2,500.

To the extent that person’s share of the policy cost was less than $2,500, that person has broken even on the deal. To the extent that his/her share was $2,500 or more, his/her share of the cost would be $2,500 less.

Step Three: The government did not like this, did not like this at all. They huffed and they puffed and they issued Notice 2013-54, which pretty much indicated that the government was not going to allow a mixture of Obamacare individual health policies and employer reimbursement plans. Many practitioners were shocked. Heck, I myself had a similar plan at one time.

But there were a select few companies who continued marketing these things. Introduce some painful and lawyerly reading of the rules, and the companies declared that “their” plan would somehow pass muster with Notice 2013-54.

If there was any legitimate question, there is none now.

Let’s review Q&A 3:

Q: 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?

A: No. … the arrangements described in this Q3 are themselves group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits….

Second, as explained in …, such arrangements are subject to the market reform provisions of the Affordable Care Act …. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms, and, therefore, will violate …., which can trigger penalties such as excise taxes under section 4980D of the Code.

There are extremely limited exceptions, such as a one-person employer, but the broad broom has swept. The government is not going to allow a tax-free employer reimbursement for an individual policy acquired on an exchange.

So what if the employer included the reimbursement on the employee’s W-2? It would not be tax-free then, by definition. My previous understanding was that an employer could reimburse the individual policy, as long as the reimbursement was included on the employee’s W-2.

COMMENT: Another way to say it is that the government doesn’t care, as long as it gets its tax.

Let’s take a look at Q&A 1:

Q: My employer offers cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

A: 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.

Huh? Wait a minute here.

I interpret this to mean that an employer cannot have employees submit their insurance bills for reimbursement in lieu of other compensation. To phrase it differently, the employer must give the employee a raise (or bonus) and the employee must decide whether he/she wants to use the raise (or bonus) toward the insurance. The employee may decide to take the money and go on vacation; the employer cannot decide this for the employee.

By the way, notice that we have been speaking about individual health policies. The above discussion does not apply to group health policies acquired through SHOP, which is the exchange for businesses with less than 50 full-time employees. Those polices are group policies, not individual policies, and do not qualify for the ObamaCare subsidy. No subsidy, different rules.

What New Paperwork Does An Employer Have Under ObamaCare?

You are an employer. You are a bit unclear on the new paperwork you need to file to comply with the Affordable Care Act (ACA), also known as Obamacare.  As we go into the fourth quarter of 2014, this issue is taking on greater urgency.

You are completely normal. Many companies, including their advisors, are in the same situation. The rules are new, complicated and – and in some cases – repetitively postponed. Are you supposed to do anything different when you send out the 2014 Forms W-2 in early 2015, for example?

The easiest way to make sense of this is to divide employers into three categories. Why? Because each employer category has its own rules.

The first category is an employer with less than 50 employees (technically, “full-time equivalents”). The Government is quick to point out that this encompasses 96% of all employers, although of course it encompasses a much smaller percentage of employees.

If this is you:

·        You do not have to do anything different with your 2014 W-2s.

·        You are not required to provide health insurance coverage to your full-time employees.

·        You are not required to pay an employer penalty.

·        This is true for 2014, 2015 and all years thereafter.

So, if you are an employer in this category you may or may not offer health insurance to your employees, but this remains a business decision. You are not required to do anything – including filing any new paperwork – to be in compliance with the ACA.

Let’s make our second category employers with 100 or more employees. Why? Technically the original ACA divided employers into two groups: under 50 employees and 50 employees and over. There have been numerous regulatory changes to the law, and one change divided employers further into 50-but-99-and-under employees and 100-employees-and-over.

If this is you… you need to get ready to make changes. 

·         You do not have to do anything different with your 2014 W-2s (fortunately). However, see below for your 2015 W-2s, which you will file in 2016.

·        You will have to provide health insurance to your employees starting January 1, 2015.

o   The ACA itself defines what is acceptable insurance, referred to as “minimum essential coverage.”

§  It also has to be “affordable.”

§  These are areas you want to review with your insurance agent or benefits consultant.

o   There is a sub-rule in here that may or may not impact you. The ACA originally required employers to cover 95% of their full-time employees in 2015. That rule has been changed. You are now required to cover 70% of your full-time employees in 2015 and then 95% for 2016 and later years.

·        You will be required to pay an employer penalty if you don’t provide minimum essential and affordable health insurance.

o   Interestingly enough, this penalty will not appear on your business income tax return. The IRS has to wait until your employees have filed their individual tax returns, then match any information provided to the IRS by the health-care exchanges and by you as the employer.

o   This is expected to be in the form of an IRS notice. You will be given time to respond, after which the IRS will issue another notice and demand for payment.

o   You can therefore expect that this notice will not go out until the end of 2016 or more likely in 2017. This is approximately one-year after you paid the underlying payroll itself.

§  We should expect that this penalty will also eventually be required to be paid via estimated tax payments.

·        You will have new paperwork when you file your 2015 year-end payroll tax returns in 2016. These are known as the “Section 6056 rules” and are in place to provide employees the information they need to calculate their ACA penalty, if any, on their individual tax returns.

o   You will file Form 1095-C Employer-Provided Health Insurance Offer and Coverage. A copy of this goes to your employee. It will also go to the IRS with its transmittal – Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns.

§  It is therefore similar to sending the W-2s with their transmittal Form W-3.

o   By the way, filing Forms 1095-C and 1094-C are optional for 2014 (to be filed in 2015). The IRS has said it would like you to file and consider them a “trial run,” but you do not have to.

o   But they are mandatory for 2015 (to be filed in 2016).

Finally, our third category: employers with 50 to 99 employees.

This category is different because in February, 2014 the IRS segregated what it called “midsized employers” (that is 50 to 99 employees). These employers received a one-year delay before facing ACA penalties – until January 1, 2016.

The “large employers” (100-or-more employees) received no such break and have to comply starting January 1, 2015.

If this is you… you need to get ready to make changes. 

·        You do not have to do anything different with your 2014 W-2s (fortunately). However, see below for your 2015 W-2s, which you will file in 2016.

·        You will have to provide health insurance to your employees starting January 1, 2016 (not 2015).

o   There is an interesting requirement, though.

§  You will have to certify – for 2015 - that…

·        You have not reduced your workforce to qualify for this relief; and

·        You have not materially reduced or eliminated any health coverage.

§  This certification is on Form 1094-C, which you will be filing anyway.

o   Otherwise, the requirements are the same as 100-and-more employers, as discussed above.

·        You will have an employer penalty for not complying, but you do not have to comply until January 1, 2016. That is, you have one additional year to comply (as compared to 100-and-more employers).

o   Otherwise, the requirements are the same as for 100-and-more employers, as discussed above.

·        You will have new paperwork when you file your 2015 year-end payroll tax returns in 2016. These are known as the “Section 6056 rules” and are in place to provide employees the information they need to calculate their ACA penalty, if any, on their personal tax returns.

o   You will file Form 1095-C Employer-Provided Health Insurance Offer and Coverage. A copy of this goes to your employee. It will go to the IRS with its transmittal – Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns.

§  It is therefore similar to sending the W-2s with their transmittal Form W-3.

o   By the way, filing Forms 1095-C and 1094-C are optional for 2014 (to be filed in 2015). The IRS has said it would like you to file and consider them a “trial run,” but you do not have to.

o   But they are mandatory for 2015 (to be filed in 2016).

You now have a high-altitude view of what you, as an employer, are to do to comply with the ACA filing requirements. Unless you are a less-than-50 employer, you will have additional reporting requirements. Please consider that some of this information is not presently collected as part of your routine accounting process. Both 50-to-99 and more-than-100 employers should review that new procedures will be in place to collect the information needed to complete these new ACA tax forms. Whereas these forms will not be filed until early 2016, they will contain information going back to January, 2015.

If A Tax Credit Falls In The Woods And No One Hears It ...

I am looking at a proposed rule for the Section 45R credit for small employers that offer health insurance.  The IRS says I have until November 25 to respond with comments.

Let’s talk about nonsense that tax practitioners have to work with.

This credit was added as an inducement for smaller employers to provide health insurance while waiting for the balance of the ObamaCare scaffolding to be erected.

As credits go, it was cumbersome to calculate and – by many reports – quite ineffective.  Many practitioners consider the credit to be such a joke they will not even bother to calculate it. Why? The professional fee to calculate the credit could be more than the credit itself.

The restrictions on the credit eviscerated almost any benefit it could provide.

(1) The credit applied to firms less than 25 employees. However, its sweet spot was ten employees, and the credit began to phase-out in excess of that number.  That eleventh employee would cost you when calculating the credit.

(2) The credit phased-out when average payroll exceeds $50,000. It sweet spot was $25,000 or less, and the credit began to phase-out in excess of that number.  Many of us were quizzical on the $25,000 strike, as average American household income is approximately twice that amount. Maybe Congress was dividing the average household income between two spouses. Who knows.

(3) Owners and their families were excluded from the credit. For many small businesses, the owner and family are a significant portion, if not the majority, of the work force. Congress had already imposed the 10/25 and $25,000/$50,000 rules, so was it necessary to also have an “off with the owners’ heads” rule? 

COMMENT: Someone please explain to Congress that excluding owners from a tax incentive is not incentivizing.

(4) There was a cumbersome calculation of “full-time equivalents” that may have tested the limited accounting resources of many small employers.

(5) The employer had to pay at least 50% of the premiums for all employees to qualify for the credit. This may be the least onerous requirement.

The credit – when finally calculated – was 35% of the health insurance premiums remaining after excluding the owners and running the two phase-outs.

… and the company had to reduce its tax deduction for health insurance by that 35%.

The credit will still be available in 2014, and it has been expanded from 35% to 50%. However the credit can only be used two more times, so if an employer uses the credit in 2014 and 2015, that employer has exhausted its maximum Section 45R mandated remaining number-of-years. Why? Who knows.

In addition, the employer has to obtain its insurance through the Small Business Health Options Program (SHOP).

NOTE: SHOP is the company-sponsored health insurance Exchange and is the counterpart to the individual health insurance Exchange.

The credit will not be available if the employer provides insurance through other means, such as through an insurance agent.

COMMENT: Think about that for a moment. Why is the credit unavailable if one purchases insurance for one’s employees through an insurance agent, a professional one may have used and relied upon for years? How does this requirement have the employees’ best interest at heart? I am at a loss to see any business reason for this. I immediately see a political-hack reason for excluding health insurance that is not sitting on a government website, however.

Let’s go though some recent headlines as we step through the looking glass:

• SHOP was to be accessible starting October 1, as were individual policies. 
• The SHOP website is accessible through HealthCare.gov, or it would be assuming the thing ever works.
• The Obama administration said in 2011 that SHOP would allow small employers to offer a choice of qualified health plans to their employees, akin to larger businesses. This “choice option” was to be available in January 2014. Administration officials have said they would delay the “choice option” until 2015 in the 33 states where the federal government runs the exchanges. This means employers would have only one plan to choose from for 2014.

COMMENT: Think about that “choice.” Yep, small businesses will be lining up to buy this thing.

• The Obama administration announced on September 26 that the opening of SHOP would be delayed a month, until November 1.
• On Tuesday, October 29, 2013, Marilyn Tavenner, the Head of the Center for Medicare & Medicaid Services, said the SHOPS would be functional “at the end of November.”

COMMENT: That is how Steve Jobs expanded Apple – by demanding “functional.” Shoot for the stars there, government bureaucrat.

• Businesses seeking coverage effective January 1, 2014 must enroll by December 15. Remember Ms. Tavenner’s comment about the “end of November.” This means that small could have as little as 15 days to enroll in SHOP.

In the Administration’s defense, the SHOP can admit employees throughout the year, so its January 1 start is not as critical as the individual Marketplace.

What is on the other side of the looking glass?

• A cumbersome credit calculation …
• That will expire after two more uses …
• For health insurance a small business may not be able to buy, resulting in  …
• A tax credit that approaches a work of fiction.

The bottom line is that the credit was almost useless before, and it is more useless now.

I guess that is my comment.