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.

The IRS Will Begin Taxing Your Employer-Reimbursed Health Insurance

There was an article last week in the New York Times titled “IRS Bars Employers From Dumping Workers into Health Exchanges.” I scanned it quickly and made a note to return to the topic.

The IRS published Notice 2013-54 last year addressing, among other things, employer use of health reimbursement arrangements (HRAs). HRAs were popular for many years as a way to offer employees a tax-free fringe benefit. A common plan was employer reimbursement of qualifying medical expenses up to a limit (say $1,500 annually, for example). I used to be in one several years ago. Twice a year I would submit medical expenses for reimbursement. Shortly thereafter, I would receive a check, all without a nick to my W-2.

Then came ObamaCare.

There are questionable definitional rules under ObamaCare. For example, ObamaCare defines a coterie of health services to be “essential health benefits” (EHBs). You cannot have limits – either annual or lifetime – on EHBs. Why no limits?  It sounds great, like free ponies and summers off, but the government had to promise the insurance companies that it would subsidize them too if ObamaCare ran off the rails.

Think about the interaction of an HRA with the rule concerning EHBs. If an HRA is considered an EHB plan, then the plan will fail because there are annual limitations on the benefit. In our example, the limitation is $1,500, the maximum the plan would reimburse any one employee.

Notice 2013-54 considered HRAs to be just that, and now HRAs – with extremely limited carve-outs – are going the way of the dodo bird.

Let’s put a twist on the HRA example. Let’s say that you buy and your employer reimburses you for health insurance. Can that reimbursement be left off your W-2?

The New York Times was addressing that question.

Let’s go through the decision grid. I see three general ways an employer can approach health insurance:

(1)  The employer provides you with health insurance.

a.     In which case the rest of this discussion does not apply

(2)  The employer does not provide you with health insurance.

a.     Your employer may have issues depending on whether it has 50 employees or more.

                                                              i.     If no, there are no penalties.

                                                            ii.     If yes, your employer has penalties.

b.    You still have no insurance, though.

(3)  The employer does not provide you with health insurance but it does provide you with money to buy health insurance.

a.     Again, your employer may have penalties, depending on whether it has 50 or more employees.

b.    You have more money, but … do you have to pay tax on that money?

Since before Alaska and Hawaii became states, the answer to that question has been “No.”

With ObamaCare, the answer is now “Yes.”

The IRS has stated that any monies provided by your employer in scenario (3) above have to be included on your W-2. This means of course that you are paying taxes on it, and your employer is also paying taxes on it. You and your employer are unhappy with this. Retailers, homebuilders and car dealers are also unhappy with this, as you will have less after-tax money to spend with them. The only one who is happy with this is the government.

You know that there will be employers who are uninformed of these new rules - or informed but not care about any new rules. What will be their penalty for noncompliance?

That is what the IRS clarified last week. The penalty is $100 per day. Yes, that is $100 times 365 days = $36,500 per year. For each employee.

Let’s gain altitude and get some perspective on why the government is being so harsh. 

Remember that policies on the individual health exchanges are eligible for subsidy if one’s family income is less than 400% of the poverty line. The government does not want an employee to go the exchange and possibly receive a government subsidy at the same time that his/her employer is also providing a nontaxable employee benefit. That would be a double-dip.

You have to admit, it is a valid point.

It is also a valid point to question what the real government policy is here: for you to have health insurance or for the government to tax you? If the former, then the government could have reduced – or denied – health exchange subsidies to compensate for an employer reimbursement plan. If the latter, then the most recent IRS pronouncement makes perfect sense.

Suit Against Subsidies Could Derail ObamaCare

Did you hear about the court decision in Halbig, et al v Sebelius? The suit was brought by six businesses against the employer mandate under ObamaCare. The federal District Judge, Paul Friedman, refused a preliminary injunction against the government, but he did say the case would be decided on an expedited basis.  That court joins Pruitt v. Sebelius, a case from Oklahoma. There is yet another suit to be heard by month-end in Richmond, Virginia.

What is going on?

They are suing over the employer penalty under ObamaCare - the $2,000 or $3,000 penalty, depending upon whether the employer offers insurance and whether the insurance meets politically correct criteria. The employer penalty triggers when an employee qualifies for a subsidy on the public exchange (the “Marketplace”). One qualifies if one’s income is below 400% of the federal poverty line and meets other criteria. The employer would then be required to subsidize some of the cost through that $2,000/$3,000 penalty.

What does it take to qualify for an individual subsidy?

Let’s do something that Congress apparently did not do when this passed this law: let’s read it:

Let’s start with Section 1311(b):

          Sec 1311(b) AMERICAN HEALTH BENEFIT EXCHANGES.—

(1) IN GENERAL.—Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an ‘‘Exchange’’) for the State that…

We read that each state is to establish an Exchange.

What if the state fails to establish an Exchange?

         

Sec 1321 (c) FAILURE TO ESTABLISH EXCHANGE OR IMPLEMENT REQUIREMENTS.

(1) IN GENERAL.—If—

(A) a State is not an electing State under subsection (b); or

(B) the Secretary determines, on or before January 1, 2013, that an electing State—

(i) will not have any required Exchange operational by January 1, 2014; or

(ii) has not taken the actions the Secretary determines necessary to implement—

(I) the other requirements set forth in the standards under subsection (a); or

(II) the requirements set forth in subtitles A and C and the amendments made by such subtitles;

the Secretary shall (directly or through agreement with a not for profit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.

We read that the Secretary will establish the Exchange.

How does an individual get to a subsidy?

SEC. 1401. REFUNDABLE TAX CREDIT PROVIDING PREMIUM ASSISTANCE FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.

(a) IN GENERAL.—Subpart C of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to refundable credits) is amended by inserting after section 36A the following new section:

SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED

HEALTH PLAN.

(a) IN GENERAL.—In the case of an applicable taxpayer, there shall be allowed as a credit against the tax imposed by this subtitle for any taxable year an amount equal to the premium assistance credit amount of the taxpayer for the taxable year.

(b) PREMIUM ASSISTANCE CREDIT AMOUNT.—For purposes of this section—

(1) IN GENERAL.—The term ‘premium assistance credit amount’ means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year.

‘‘(2) PREMIUM ASSISTANCE AMOUNT.—The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of

(A)   the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act, or

(B)    the excess (if any) of— ‘‘(i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over ‘‘(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year

Whoa. If the nuns taught me how to read English, I see that the taxpayer has to be enrolled in an Exchange pursuant to Section 1311. Section 1311 requires “each state” to do something, otherwise Section 1321 kicks in.

Question: What if a state does nothing (thereby removing Section 1311) and the federal government steps in under Section 1321. Would someone in that state be receiving a subsidy as defined under Section 1401 or not?

Can the federal government be a “state?”

Let’s look at Section 1304(d):

Sec 1304(d) STATE.—In this title, the term ‘‘State’’ means each of the 50 States and the District of Columbia.

Looks like the answer is “no.”

Considering that there are approximately three dozen states that did not set-up their own Exchange, how does the federal government propose to get an employer to pay that $2,000/$3,000 penalty despite the language in Sections 1401 and 1311?

The IRS comes to the rescue by proposing the following Regulation:

         

a taxpayer is eligible for the credit for a taxable year if . . . the taxpayer or a member of the taxpayer’s family (1) is enrolled in one or more qualified health plans through an Exchange established under section 1311 or 1321 of the Affordable Care Act . . .”

         

Good grief! Well, one thing about Tony is that he could always count on Paulie and Christopher to back him up.

Does law mean nothing to this crowd? Perhaps the law is flawed, perhaps it was poorly drafted, but it still law. How many times have I read about unintended consequences of the alternative minimum tax or about some poor taxpayer being hung out to dry because he/she did not get that “special” piece of paper the IRS wanted in order to substantiate a transaction?  How did the IRS invariably defend its position? By arguing that the law is the law and that Congress should remedy any inequity.  

In a swell of self-importance, the Administration and its enablers refuse to accept that the same law that applies to you or me also applies to them. Instead they argue that:

         

(1) Justice Roberts decided that the penalties are a tax. The Anti-Injunction Act precludes plaintiffs from challenging the imposition of a tax before it is actually assessed.

(2) The plaintiffs lack standing due to the speculative nature of any claimed injuries.

(3) Following the White House announcement of the one-year delay of the employer mandate, the court should also delay its consideration.

(4) The language around subsidies represents but one of the ACA’s many drafting errors.

(5) Congress clearly intended to have tax credits available in all the states.

Let me get this straight: their argument is that Tony did not clearly intend for me to defend myself until after I was shot, because before then any self-defense would be speculative and contingent on the actions of someone for whom English is a second language. 

Really?

Let us review history to understand how we got into this mess. The House had a bill. The Senate had a bill. The bills were different. The Senate wanted to force the states to absorb the Exchanges, but it ran into a problem with Pritz v United States (1997):

[T]he Federal Government may not compel the states to implement, by legislation or executive action, federal regulatory programs.’’

The Senate instead added a provision for federally established exchanges as a backup option for states that refused to set up exchanges.

Remember that bill could not obtain bipartisan support, and it was passed on a Saturday night at late hour, after the Louisiana Purchase, the Cornhusker Kickback and who-knows-what-else. The Democrats had lost their Senate 60-vote majority in January 2010, meaning they could not override the expected filibuster.  To push the bill through the Senate, Reid forced a reconciliation vote - a tactic normally reserved to limit debate on budget bills. This tactic however did not allow for a normal Senate-House joint committee process to reconcile burrs in the law. How could it? It was designed for budget and debt ceiling items, not for something like this.

Let’s see what happens in Halbig and Pruitt. Judge Paul Friedman hopes to have his opinion out by February.