The IRS Meant What It Said in Notice 2013-54 – Employers Who Pay For Individual Health Insurance Policies for Employees On a Pre-Tax Basis Face Massive Penalties

In our 2013 End of Year Plan Sponsor “To Do” List  Part 2 – Health and Welfare I did a lengthy summary of the various changes required to employer health care arrangements on account of IRS Notice 2013-54.  On May 6, 2014, I followed that up with a blog entitled Non-integrated health reimbursement arrangements (whatever they are called) are subject to $36,500 per-participant per-year penalty.  I am compelled to follow-up with yet another blog regarding the importance of IRS Notice 2013-54.

On May 13, 2014, the IRS issued two very direct Q&As about the impact of Notice 2013-54 on employers who pay for individual health insurance policies for employees on a pre-tax basis.  As highlighted by the IRS, the penalties for paying for individual insurance policies for employees on a pre-tax basis are massive — $36,500 for each employee.

After-tax arrangements to pay for individual health insurance policies appear to be permissible, but employers who pay for individual health insurance policies on an after-tax basis must be careful that they fall within the Department of Labor’s voluntary plan safe harbor.

The two new IRS Q&As are reproduced below, in their entirety.

Employer Health Care Arrangements

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.

Q2. Where can I get more information?

On Sept. 13, 2013, the IRS issued Notice 2013-54, which explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy.

DOL has issued a notice in substantially identical form to Notice 2013-54, DOL Technical Release 2013-03, and HHS will shortly issue guidance to reflect that it concurs with Notice 2013-54. On Jan. 24, 2013, DOL and HHS issued FAQs that addressed the application of the Affordable Care Act to HRAs.

If you haven’t previously considered the impact of Notice 2013-54 on your various employer health care arrangements, this latest guidance highlights how important it is to do so.