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Small Business Employee Benefits and HR Blog

IRS FAQ Underscores Importance of Compliance with ACA Rules

June 3, 2014

On May 13, 2014, the IRS posted a new FAQ (the “FAQ”) on Employer Health Care Arrangements. This FAQ addresses Employer Payment Plans as defined in IRS Notice 2013-54 (the “Notice”). While this FAQ is not a new rule, it underscores the importance of ensuring compliance with both the annual limit rules and the preventive care requirements (the "Market Reforms") simultaneously.

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What the FAQ Says

The FAQ re-emphasizes the compliance requirements outlined in IRS Notice 2013-54.

Specifically, it re-states that if an employer establishes a reimbursement arrangement that fails to comply with the Market Reforms, the employer may be subject to a $100/day excise tax per applicable employee. This underscores the importance of ensuring compliance with the Market Reforms when reimbursing employees for individual health insurance costs. The penalty is limited to 10% of the amount paid under the plan if the failure is due to reasonable cause and the tax can be avoided in entirety if the employer can show that they did not know that the failure existed and it is corrected within 30 days (see IRC Section 4980D).

Can Employers Still Reimburse Employees for Individual Health Insurance Premiums Tax-Free?

Yes. The tax code explicitly allows tax-free reimbursement of individual health insurance premiums. This is documented in the tax code and has been clarified in numerous IRS publications, including IRS Notice 2013-54 and the recent FAQ.

For example, an employer can absolutely establish a Self-insured Medical Reimbursement Plan (as defined in IRC Section 105) that reimburses medical care (as defined in IRC Section 213(d)). Per the code, "medical care" includes "amounts paid" for individual health insurance.

Here are the facts:

1. An employer can absolutely establish a "Self-insured Medical Reimbursement Plan" (as defined in IRC Section 105) that reimburses medical care (as defined in IRC Section 213(d)). Per the code, "medical care" includes "amounts paid" for individual health insurance.

2. The Self-insured Medical Reimbursement Plan is its own group health plan and must comply with the other (non tax code based) rules including PHS Act 2711 (annual limit) and PHS Act 2713 (preventive care) rules as outlined in Notice 2013-54 (and the recent FAQ).

3. If an employer designs the Self-insured Medical Reimbursement Plan to comply with the rules in #2, there is no penalty (and everyone wins). Click here for information on how to design a Self-insured Medical Reimbursement Plan in compliance with these rules.

4. If an employer does not design the Self-insured Medical Reimbursement Plan to comply with the rules in #2, there may be penalties if a specific failure is identified (don’t do this).

In order to avoid the penalties discussed in the FAQ, employers need to ensure their reimbursement arrangement complies with the Market Reforms.

Due to the complexity of the new market reforms and federal regulations, many employers prefer to contract with a third party to help ensure compliance and to avoid unnecessary tax penalties.

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