IRS Warns Employers About Using Payment Plans to Reimburse Employees on a Pre-Tax Basis for Health Insurance Premiums
Clients frequently ask us questions such as, “Can a 125 Cafeteria plan allow for reimbursement of insurance premiums for an individual who does not choose to participate in his employer’s health plan? Instead he or she chooses to get their own policy.” Or, assume the individual does use the employer’s health plan but gets an individual policy for his or her spouse and children. “Can a 125 plan allow for reimbursement of those premiums?”
In a recent communication, the IRS warned employers about using payment plans to reimburse employees on a pretax basis for health insurance premiums the employee pays on an individual policy (either through a qualified health plan in the Marketplace or outside the Marketplace).
As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms.
Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under IRC Sec. 4980D. (The term employer payment plan generally does not include an arrangement under which an employee has the option of receiving an after-tax premium reimbursement or taking that amount in cash compensation. Thus, employers can reimburse employees for individual policies on an after-tax basis without violating market reforms.)
If you have any questions, please do not hesitate to contact Warady & Davis LLP directly at 847-267-9600.
Source: IRS website – www.irs.gov.