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.
