Small businesses have offered their staff health coverage in the past through arrangements that would meet the requirements to be considered an employer payment plan (Notice 2013-54). Do these employers owe an excise tax under Code § 4980D?
For the most part, the answer is yes. Notice 2013-54 states that arrangements establishing employer payment plans that fail to adhere with the market reforms could expose employers to the excise tax (Code § 4980D).
What about a 2% shareholder-employee healthcare arrangement? Are these agreements held accountable to the market reforms?
The tax treatment for an S Corporation 2% shareholder-employee will not be affected and they will still be exempt from FICA taxes.
In deciding to offer reimbursement to active employees on Medicare premiums, does an employer create an employer payment plan under Notice 2013-54? If the answer is yes, may the employer payment plan be combined with another group health plan to appease the market reforms? Furthermore, does an arrangement under which an employer reimburses (or pays directly) some or all of medical expenses for employees covered by TRICARE (health care program of the US DOD Military Health System) establish an HRA subject to the market reforms? If so, could the HRA be combined with another group health plan to appease the market reforms?
Medicare premium reimbursement arrangements. An arrangement in which an employer reimburses (or pays directly) part or all of Medicare Part B or Part D premiums for employees establishes an employer payment plan (Notice 2013-54). If the aforementioned covers two or more active employees, it is then considered a group health plan that is held accountable to the market reforms. An employer payment plan may not be combined with Medicare coverage to appease the market reforms because Medicare coverage is not considered a group health plan.
TRICARE-related HRAs. Likewise, an arrangement where an employer reimburses (or pays directly) some or all of an employee’s medical expenses covered by TRICARE establishes an HRA. As Notice 2013-54 states, if such an arrangement covers two or more active employees, it is considered a group health plan that is held accountable to the market reforms. An HRA may not be combined with TRICARE to appease the market reforms because TRICARE is not considered a group health plan in this instance.
An employee receives an increase in compensation, but the employer does not condition the payment of the added compensation on the purchase of health coverage. Is this considered an employer payment plan?
No, it is not. As illustrated in Notice 2013-54, an employer payment plan is defined as group health plan in which an employer reimburses an employee for part or all of their premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee, such as arrangements illustrated in Rev. Rul. 61-146.
May the reimbursements or payments under an arrangement illustrated in Rev. Rul. 61-146 be given on an after-tax basis? If so, will this cause the arrangement not to be considered a group health plan (and accordingly not to be held accountable to the market reforms)?
Quite simply – no. Rev. Rul. 61-146 states that under certain contexts, if an employer decides to reimburse an employee’s extraordinary premiums for non-employer sponsored hospital and medical insurance, the payments are not included in the employee’s gross income (Code § 106). This also applies if the employer decides to pay the premiums straight to the insurance company. Therefore, the arrangement is held accountable to the market reform requirements of the Affordable Care Act applicable to group health plans. Such employer health care plans cannot be combined with individual market policies to appease the market reforms and, therefore, will not appease PHS Act §§ 2711 (annual limit prohibition) and 2713 (obligation to offer cost-free preventive services) among other requirements.
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