With healthcare reform, it’s been unclear how the IRS would treat employers opting to reimburse employees for individual health insurance premiums in lieu of offering a group health plan. On May 19th, 2014 the IRS released the following short FAQ that makes its stance clear.
The specific question that the IRS posted on its site was, “What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?”
In their response, the IRS referenced Notice 2013-54, emphasizing that these employer payment plans are considered group health plans under PPACA. As group health plans, these arrangements are subject to the market reforms, including the prohibition on annual limits and the requirement to cover preventive care without cost-sharing. These arrangements cannot be integrated with individual health insurance plans in order to satisfy the market reform requirements.
Unlike Notice 2013-54, this recent FAQ shines a spotlight on the consequences for employers operation employer payment plans to reimburse employees for the cost of individual health insurance policies. The potential penalty? Up to $100 per day per applicable employee, under Code 4980D. The IRS also points out that the penalty could total $36,500 per year per employee. This figure does not include potential liability as a result of additional DOL enforcement of compliance with the market reforms, incorporated into ERISA by the Public Health Service Act (PHSA).
The Department of Labor also issued Technical Release 2013-03, which is substantially similar to Notice 2013-54 and Technical Release 2013-03. Employers currently utilizing this strategy or who are considering the implementation of such an employer payment plan should consult with counsel on the impact of Notice 2013-54 Technical Release 2013-03 and this FAQ to consider the risks and find an alternative benefits strategy if necessary.