Over the last two years, Internal Revenue System, Department of Health and Human Services and Department of Labor have individually issued FAQs that state that the employer payment plans or the premium reimbursement plans for health coverage of individuals are prohibited as they are not in compliance with the Affordable Care Act and Health Care Reform.

Any employer found violating the rule would be subjected to pay an excise tax of up to $36,500 per year that is $100 per day for every employee. Although, small employers are not subjected to the shared responsibility mandate for providing coverage to employees or pay penalty, but if they offer health coverage, then it must meet ACA coverage requisites.

Here are a few facts from the Notice 2015-17 issued by IRS:

What’s wrong with Employer Payment Plans?

In the Notice, employer payment plan is regarded as the arrangement where the employer either pays directly or reimburses for the individual coverage premium (full or partial). This is why plans are also referred as the premium reimbursement plans. They are not found to be compliant with ACA as IRS sees them as group health plans that come under ACA along with certain conditions such as to provide preventive care, and prohibit annual or lifetime limits on fundamental health benefits. But, premium reimbursement plans do not meet these conditions and are considered to be non-compliant.

Why Transition Relief is Granted?

Since the small employers have been found to be providing health coverage to employees by paying for their individual policies, therefore, they need additional time to look out for other group health coverage or other appropriate options.

Therefore, the transition relief, as stated in IRS Notice issued on Feb 18, 2015, was granted to the small employers who used the premium payment arrangements in 2014. They will also not be required to pay penalties for practicing arrangements from Jan. 1 to June 30, 2015 and are required to end the plans by the end of the June 30 deadline. Whereas, the large employers practicing the same were not given any relief and are required to self-report about it on IRS’s excise tax form 8928 with quarterly filings.

What is Allowable?

As per the Notice 2015-17, if a small employer increases employee’s compensation without stating that the increase is to contribute in purchasing health insurance, then it would not be considered as employer payment plan. Therefore, such increase in compensation is acceptable as it does not constitute group health plan and is not subject to market reforms.

What Employers Should Do Now?

The small employers who are not offering any employer payment or premium reimbursement plans need to worry, while those who have been offering these plans for individual insurance policies need to change their offerings before June 30, 2015 in order to avoid paying any penalties.
Large employers who have been practicing the same are needed to self report and pay tax through IRS form 8928.

Employers, both large and small, who are paying for individual policies, need to decide if they want to increase employee compensations that do not reimburse for premiums.

Conclusively, as the deadline comes close, employers need to take actions promptly in order to safeguard themselves from paying any penalties for non-compliance with ACA provisions.