‘Employer Payment Plans’ Violate Market Reforms, Give Rise to Significant Penalties
An employer payment plan is an arrangement under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or uses its funds to directly pay the premium for an individual health insurance policy covering the employee. As part of the implementation of the Affordable Care Act (ACA), new rules apply to employer payment plans. The summary below is intended to help employers understand these new rules and remain compliant with the ACA.
ACA Market Reforms
The ACA contains certain “market reforms” that apply to group health plans, including the:
- Annual Dollar Limit Prohibition: A prohibition on any annual limit on the dollar amount of benefits for any individual; and
- Preventive Services Requirement: A requirement that non-grandfathered plans provide certain preventive services without imposing any cost-sharing requirements for these services.
Application of the ACA Market Reforms to Employer Payment Plans
An arrangement under which an employer provides reimbursements or payments that are dedicated to providing medical care, such as cash reimbursements for the purchase of an individual market policy, is itself a group health plan under the ACA. Accordingly, the arrangement is subject to the ACA market reforms without regard to whether the employer treats the money as pre-tax or post-tax to the employee.
If a group health plan does not itself comply with the market reforms, the plan must be integrated with a group health plan that is in compliance. However, the Internal Revenue Service (IRS) has stated that an employer payment plan cannot be integrated with an individual market policy to satisfy the market reforms. Consequently, employer payment plans may be subject to an excise tax penalty of $100 per day per applicable employee ($36,500 per year, per employee) under the Internal Revenue Code.
Alternative to Employer Payment Plans
According to IRS Notice 2015-17, if an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance), this arrangement is not an employer payment plan.
Check out our Cash for Premium Payments & Other Employer Payment Plans section for additional information.
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Please Note: The information and materials herein are provided for general information purposes only and are not intended to constitute legal or other advice or opinions on any specific matters and are not intended to replace the advice of a qualified attorney, plan provider or other professional advisor. This information has been taken from sources which we believe to be reliable, but there is no guarantee as to its accuracy. In accordance with IRS Circular 230, this communication is not intended or written to be used, and cannot be used as or considered a ‘covered opinion’ or other written tax advice and should not be relied upon for any purpose other than its intended purpose.
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