Tax Roundup, 11/10/14: DOL nixes many employer health reimbursement setups. And: Sheldon!

November 10th, 2014 by Joe Kristan

Good morning from beautiful, if frigid, Sheldon, Iowa, where I am on the Day 1 panel of the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School. A good crowd has braved the brisk north winds and forecasts of snow — so now it’s up to us to make them glad they did.

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Elections are over I. Branstad says Iowa road funding a top priority, raising fuel tax on the table (Omaha.com)

Elections are over II. FAQs about Affordable Care Act Implementation (Part XXII) The Department of Labor has issued new guidance on small-employer plan arrangements. The guidance, issued just after the election, puts strict limits on the ability of employers to bypass group plan rules by reimbursing premiums or using Health Reimbursement Arrangements under Section 105. As plans doing that have been marketed to small employers in Iowa and elsewhere, this could be an expensive development for employers; violating these rules carries a $100 per day penalty for each affected employee.

The FAQ discusses premium reimbursement arrangements: (my emphasis):

My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

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. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Securi20121120-2ty Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.(6)

This means that employers cannot have employees submit their insurance bills for reimbursement; doing so is considered a disqualified group insurance plan. The closest the employer can do is give an employee a raise without restriction, giving the employee the option of buying insurance.

The FAQ pretty much embalms Sec. 105 plans as substitutes for group plans.

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?

No. The Departments have been informed that some vendors are marketing such products. However, these arrangements are problematic for several reasons. First, the arrangements described in this Q3 are themselves group health plans and, therefore, employees participating in such arrangements are ineligible for premium tax credits (or cost-sharing reductions) for Marketplace coverage. The mere fact that the employer does not get involved with an employee’s individual selection or purchase of an individual health insurance policy does not prevent the arrangement from being a group health plan. DOL guidance indicates that the existence of a group health plan is based on many facts and circumstances, including the employer’s involvement in the overall scheme and the absence of an unfettered right by the employee to receive the employer contributions in cash.(12)

DOL LogoSecond, as explained in DOL Technical Release 2013-03, IRS Notice 2013-54, and the two IRS FAQs addressing employer health care arrangements referenced earlier, such arrangements are subject to the market reform provisions of the Affordable Care Act, including the PHS Act section 2711 prohibition on annual limits and the PHS Act 2713 requirement to provide certain preventive services without cost sharing. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code.

It is difficult to determine the policy reasons behind this. As best I can tell, it seems to be that the DOL wants employees to be covered either under traditional group plans set up under the small business exchanges, or on individual plans purchased through the regular exchanges. Whatever the policy justification, it’s bad news for any employers using such arrangements, as the rules are already in effect for 2014.

Paul Neiffer has more at DOL Plays Hardball (Don’t Shoot the Messenger)!

If you are dealing with any vendor offering Section 105 plans that are attempting to make payment of health insurance premiums for more than one employee deductible by the employer and exempt from payroll taxes, be extremely careful.  As you can see from this Q #3, the DOL takes a dim view of these arrangements.

One last area of concern that was not addressed by the DOL is what happens with S corporation shareholders who have health insurance premiums reimbursed.  Under the self-employed health insurance deduction rules, there is a requirement for reimbursement; under the DOL Q&A, these reimbursements may run afoul of the ACA requirements.  If we get further clarity on this, we will let you know.

I understand this as restricting S corporation 2% owners to group plans, without a reimbursement option, but I suspect clarification is forthcoming.

Additional coverage from ISU-CALT: Updated! Heal.th Reimbursement Plans Not Compliant with ACA Could Mean Exorbitant Penalties.

 

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Sheldon scene, 2013. It’s slightly less cold this year.

William Perez, What You Need to Know about Reporting Payments Using Form 1099-MISC

Kay Bell, IRS taxpayer service outlook, short- and long-term, is bleak

Robert Everett JohnsonIRS Seizure of Assets Using Anti-Structuring Laws (Procedurally Taxing). It is a guest post by an attorney for the heroic Institute for Justice, which is defending the Arnolds Park, Iowa resturaunteur whose cash was stolen by the IRS.

TaxGrrrl, IRS Warns Taxpayers To Be Diligent As Identity Thieves Add New Twist To Phone Scam.

Russ Fox, Since the Dead Vote, Why Can’t They Get Tax Exemptions? “Cook County has begun to make sure that seniors are truly alive when taking the exemption.”

 

TaxProf, The IRS Scandal, Day 550. Todays links hit heavily on the failure of the agency to even look for the missing Lois Lerner e-mails in its servers or backup tapes. Yet Commissioner Koskinen just doesn’t understand why Republican appropriators don’t want to entrust him with a bigger budget.

Career Corner. Gentlemen, If Your Firm Offers Paternity Leave, Take All Of It (Caleb Newquist, Going Concern). Yes, it gives you lots of time to interview for that new job you’ll be needing.

 

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