Small Business Reprieve on Health Premium Reimbursement Plans
Historically, companies 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 employees an amount of money sufficient to reimburse them for the cost of buying the coverage (or some portion of it). As long as the individuals provided evidence that they used those funds for health coverage, the dollars were excludable from taxable income for the employees.
Alternatively, companies could just pay the premiums directly to the insurance carrier.
However, back in November 2014, the Department of Labor (DOL) declared that companies reimbursing employees for medical care instead of offering a health care plan is the equivalent of having 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 that no co-pay for certain preventive health services must be paid — they were ruled to be noncompliant with the law.
Per Employee Penalty
This DOL ruling reiterated 2013 guidance from the IRS. The kicker: Beginning in 2014, companies with such reimbursement arrangements in place would be subject to a $36,500 penalty per employee.
The only remedy offered by the DOL was for companies 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 would not be required to use it to pay for health coverage.
The IRS's latest ruling, 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 businesses with reimbursement plans in place will not be penalized unless they maintain them beyond June 30 of this year. Small businesses 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 been required with companies' 2014 tax returns.
The reprieve also applies to plans that help retirees pick up the tab for Medicare Part B and D premiums.
Employees with S Corp Stock
Employees who own at least 2 percent of their employers' stock (if the company is an S corp) are treated differently. 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.
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.
Notice 2015-17 reconciles the IRS with a position the DOL had taken earlier — that is, declaring reimbursement plans as merely taxable payments to employees doesn't 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, small businesses with fewer than 50 employees and full-time equivalents are not required to provide health plans under the ACA.)
The guidance also made it clear that the ACA's market reforms, as they pertain to this issue, don't 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 aren't an employee, but you have one employee and want to reimburse that person for the cost of buying individual coverage, you won't be subject to any penalties.
Monthly Health Allowances
Meanwhile, the entrepreneurial spirit of America is at work to help small businesses 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." It gives employees access to a "monthly health allowance." However, companies considering such arrangements should consult legal counsel for an opinion as to whether the plan would pass muster with the IRS and DOL.
For additional information, please contact Deirdre Hartmann, CPA on (973) 328-1825