In a recent notice, the Internal Revenue Service has tempered prior guidance that closed the door on employer arrangements for paying the cost of individual health insurance for employees. The IRS still views these premium reimbursement arrangements as group health plans that fail to meet the Affordable Care Act (ACA) prohibition against annual dollar limits for essential health benefits (and perhaps other ACA provisions). However, the new notice offers transitional relief to some employers and several helpful clarifications.

In particular, the new notice:

  • Temporarily relieves small employers (with fewer than 50 full-time employees or full-time equivalents under the ACA) from the excise tax that might otherwise apply. This reprieve lasts through June 30, 2015.
  • Pending further guidance, relieves S-corporations from the excise tax for an arrangement that subsidizes the cost of individual health insurance for employees who are 2-percent shareholders.
  • Permits arrangements that pay some or all of the cost of Medicare Part B or D and TRICARE (the U.S. Department of Defense’s health care program for active duty and retired military service members and their families) if they meet specified conditions.
  • Clarifies that an arrangement reimbursing the cost of individual health insurance premiums for only one employee does not violate the ACA because it is not a group health plan. The ACA exception for plans covering fewer than 2 active employees applies.
  • Observes that arrangements may be group health plans if they are before-tax or after-tax, but that an increase in compensation that is not conditioned on the purchase of health coverage is not a health plan.

Small employers that qualify for the transitional relief should make sure to reexamine their insurance reimbursement practices before the July 1 deadline.

As the federal health care reform effort gained steam, Ballard Spahr attorneys established the Health Care Reform Initiative to monitor and analyze legislative developments. With federal health care reform now a reality, our attorneys are assisting health care entities and employers in understanding the relevant changes and planning for the future. They also have launched the Health Care Reform Dashboard, an online resource center for news and analysis on developments under the ACA.

If you have questions about the new notice, contact Edward I. Leeds at 215.864.8419 or or any other member of our Employee Benefits and Executive Compensation Group.