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In May 2014, the IRS drove the point home that it will work toward implementing certain policy directives included in the Affordable Care Act (ACA) by the enforcement of certain provisions of the ACA with violations thereof resulting in stiff penalties. Employers would do well to pay close attention to these rules for reimbursing employees for ACA health plans.

Previously, in September 2013, the IRS issued guidance in the form of Notice 2013-54 that provided that certain employer payment plans would not meet the requirements of the ACA’s “market reforms.” Under the ACA market reforms, plans where the employer does not establish health insurance for employees but reimburses the employees for individual coverage obtained in another qualified health plan or in an exchange would be considered an “employer payment plan” if pre-tax dollars were used to pay the premiums. These plans, considered under the ACA to be a group health plan by definition, would violate the market reform requirement that there be no annual limit for essential health benefits and, in addition, would not meet the requirement that the plan provide certain preventive care without cost sharing.

If after-tax dollars were used to pay premiums, such would not be considered an employer payment plan and subject to the Affordable Care Act prohibition. [Updated! See the article addressing recent DOL guidance here indicating after-tax amounts to also be prohibited.]

In May 2014, in order to further reinforce the IRS’s distaste for an employer’s use of pre-tax dollars to help fund an employee’s purchase of individual insurance on the exchanges or through other group health plans, the IRS issued FAQ on the subject. It can be found here. The FAQ reads as follows:

“Q1. 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)?

Under IRS Notice 2013-54, such arrangements are described as employer payment plans. An employer payment plan, as the term is used in this notice, generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.” (emphasis added)

Therefore, if an employer fails to satisfy the Affordable Care Act market reforms by continuing to operate an employer payment plan paying individual premiums with pre-tax dollars, the employer may be subject to the stiff excise tax of up to $100 per day, per employee (potentially $36,500 per year, per employee). [Updated! See the article addressing recent DOL guidance here indicating after-tax amounts to also be prohibited.]

Notice 2013-54 also provided guidance with respect to how the ACA’s market reforms apply to certain other types of group health plans, including health reimbursement arrangements (HRAs) and health flexible spending arrangements (HSAs). In light of the recent guidance regarding employer payment plans, the IRS can be expected to similarly enforce the ACA market reform provisions with respect to these other types of plans as well.