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Toll Free: 877.880.

4477
Phone: 281.880.6525

Small Employers Get Reprieve on


Health Premium Reimbursement Plans

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Background: Historically, employers that wanted their employees to be


protected with health coverage, but didn't want the hassle of having a
company health plan, could simply give them an amount of money sufficient
to reimburse them for the cost of buying that coverage or some portion of it.
As long as the individuals provided evidence that they used those funds for
that purpose, the dollars were excludable from taxable income for the
employees.

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Alternatively, employers could just pay the premiums directly to the insurance
carrier.
Back in November 2014, however, the Department of Labor (DOL) declared
that companies reimbursing employees for medical care instead of offering a
health care plan is equivalent to a health plan and is subject to the Affordable
Care Act (ACA).

And since those reimbursement arrangements failed to meet ACA


requirements in two ways -- that is, the condition that group health plans have
no annual limits on benefits, and also that no co-pay for certain preventive
health services must be paid -- they were ruled to be noncompliant with the
law.

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$36,500 Per Employee Penalty


This DOL ruling doubled down on a 2013 decree by the IRS saying essentially
the same thing. The kicker was that, beginning in 2014, employers with such
reimbursement arrangements in place would be subject to a $36,500 penalty
per employee.

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The only remedy offered by the DOL was for employers to gross up those
contributions (that is, add to them enough money to cover the tax liability
employees would incur as a result of receiving the payments), plus make it
clear to employees that they could do whatever they wanted with all of the
money they received. In other words, they could not be required to use it to
pay for health coverage.

The IRS's latest ruling, known as Notice 2015-17, which the tax agency says is
in sync with the most recent DOL policy on the matter, gives everyone time to
catch their breath.
Specifically, small employers with reimbursement plans in place will not be
penalized unless they maintain them beyond June 30 of this year. Employers
are also off the hook for having to file Form 8928, which is the form that
covers failures to satisfy group health plan requirements. Originally that form
would have to have been filed with employers' 2014 tax returns.
The reprieve also applies to plans that help retirees pick up the tab for
Medicare Part B and D premiums.

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Employees with Sub S Corp Stock


Employees who own at least 2 percent of their employers' stock (if the
company is a Sub S corp) might come in for different treatment. Such
employees were required to report the premium reimbursement payments as
income on their 1040s, even though the payments were not subject to payroll
tax. But those same employees could also take a deduction equal to the
amount of that income, leaving them tax-neutral.

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In IRS Notice 2015-17, the tax agency warns that it and the DOL "are
contemplating publication of additional guidance on the application of the
market reforms to a 2 percent shareholder-employee healthcare
arrangement." Until then, however, the companies are off the hook. So, too,
are the employees who will continue to be allowed to deduct that income as
self-employed health insurance premiums.
The Notice reconciles the IRS with a position the DOL had taken earlier -- that
is, declaring reimbursement plans as merely taxable payments to employees
does not prevent them from being deemed health plans. That means the only
way to help employees secure health coverage without having a bona fide
health plan is to just give each employee a raise and hope they will use it to
buy their own health coverage.
(Keep in mind, employers having fewer than 50 employees and full-time
equivalents are not required to provide health plans under the ACA.)

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Notice 2015-17 also made it clear that the ACA's market reforms, as they
pertain to this issue, do not extend to arrangements covering only a single
employee (regardless of whether that employee is a 2 percent-or-more
shareholder). That means if you own your company and are not an employee,
but have one employee and want to reimburse that person for the cost of
buying individual coverage, you will not be subject to any penalties.
Meanwhile, the entrepreneurial spirit of America is at work to help small
employers that just want to help employees pay for individual coverage, but
don't want to run afoul of the IRS and DOL. One benefits company offers a
web-based defined contribution arrangement it calls "Individual Health
Reimbursement for Small Business," which gives employees access to a
"monthly health allowance."
However, employers considering such arrangements should consult legal
counsel for an opinion as to whether the plan would pass muster with the IRS
and DOL.

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14550 Torrey Chase Blvd., Ste. 360 Houston, TX 77014 USA


Toll Free : 877.880.4477
Phone
: 281.880.6525
Fax
: 281.866.9426

E-mail : info@hrp.net

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