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.

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.