Category Archives: Health Reimbursement Accounts

Qualified Small Employer HRAs Face Steep Compliance Path

Co-authored by
Christine P. Roberts, Mullen & Henzell L.L.P and
Amy Evans of Colibri Insurance Services, Inc.

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Passed in December 2016, the 21st Century Cures Act backtracked in part on an abiding ACA principle – namely, that employers could not reimburse employees for their individual health insurance premiums through a “standalone” health reimbursement account (HRA) or employer payment plan (EPP).  Specifically, the Cures Act carves “Qualified Small Employer Health Reimbursement Arrangements” or QSE HRAs — out from the ACA definition of group health plan subject to coverage mandates, permitting their adoption by eligible small employers, subject to a number of conditions.  The provisions are effective for plan years beginning after December 31, 2016.

The compliance path for QSE HRAs is steep enough that they may not be adopted by a significant number of eligible employers. Below we list the top five compliance hurdles that small employers will face:

1.   Requirement that no group health plan be maintained.

In order to be eligible to maintain a QSE HRA an employer must not have more than 50 full-time employees, including full-time equivalents (measured over the preceding calendar year), and in addition it must not maintain any group health plan for employees.  Small businesses are more likely than not to offer some health coverage to employees, although eligibility may be limited as in a “management carve-out” arrangement.  Business owners may be reluctant to part with group coverage, such that QSE HRAs may have most appeal to small employers that never offered coverage at all.

2.  Confusion over impact on premium tax credits.

A significant amount of confusion exists as to whether QSE HRA benefits impact an employee’s eligibility for premium tax credits on a health exchange.  The confusion is natural as the applicable rules are quite confusing.  Fundamentally, if a QSE HRA benefit constitutes “affordable” coverage to an employee (which requires a fairly complicated calculation), then the employee will be disqualified from receiving premium tax credits.  If a QSE HRA is not affordable (that calculation again), then the QSE HRA benefit will reduce, dollar for dollar, the premium tax credit amount for which the employee qualified.  We have only statutory text at this point and regulations will no doubt provide more clarity, but small employers may still struggle to understand the interplay of these rules and may be even less equipped to assist employees with related questions.

3.  Annual notice requirement.

A small employer maintaining a QSE HRA must provide a written notice to each eligible employee 90 days before the beginning of the year that:

  • Sets forth the amount of permitted benefit, not to exceed annual dollar limits that are adjusted for inflation (currently $4,950 for individual and $10,000 for family coverage);
  • Instructs the employee to disclose the amount of their QSE HRA benefit when applying for premium tax credits on a health insurance exchange; and
  • Reminds the employee that, if he or she is not covered under minimum essential coverage (MEC) for any month a federal tax penalty may apply, and in addition contributions under the QSE HRA may be included in their taxable income. (The QSE HRA is not itself MEC.)

If compliance with the annual notice requirements under SEP and SIMPLE plans is any guide, small employers may find it difficult to consistently provide the required written notice. The Cures Act imposes a $50 per employee, per incident penalty for notice failures, up to $2,500 per person.  Penalty relief is available if the failure is demonstrated to have been due to reasonable cause and not willful neglect.

4.  Annual tax reporting duties.

Small employers must report the QSE HRA benefit amount on employees’ Forms W-2 as non-taxable income.   ACA tax reporting for providers of “minimum essential coverage” (MEC), namely, providing Form 1095-B to each eligible employee and transmitting  copies of all employee statements to the IRS under transmittal Form 1094-B  –would not appear to be required for sponsors of QSE HRAs, as MEC reporting will be done by the individual insurance carriers.  Clarity on this point would be welcome.

5.  Lack of financial incentive for benefit advisers.

Small employers will (reasonably) look to health insurance brokers for guidance and clarification on these complex issues. They will also need assistance with QSEHRA set-up, including shopping TPAs to compare services and fees, educating employees on enrollment and use, handling service issues during the year, and satisfying the annual notice requirement and annual tax reporting duties. Unfortunately, the benefit broker and adviser community has little financial incentive to recommend QSEHRAs, because commissions are based on a relatively low annual administrative fee and do not provide reasonable compensation for this work.  This in turn could result in low uptake by small employers.

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Filed under Affordable Care Act, Benefit Plan Design, Health Reimbursement Accounts, Health Reimbursement Arrangements, Plan Reporting and Disclosure Duties, PPACA, Premium Tax Credits, Qualified Small Employer HRAs

Reason to Celebrate: IRS Extends ACA Reporting Deadlines

On December 28, 2015, the IRS gave Applicable Large Employers (“ALEs”) a last-minute extension of their 2015 ACA reporting deadlines via Notice 2016-4.  The original and new, extended deadlines, which apply only to reporting for 2015, are as follows:

Capture ACA II.JPGThe same extensions apply to providers of minimum essential coverage such as insurance carriers and government-sponsored programs (Medicare, Medicaid), who are required to file Form 1094-B and furnish statements to covered individuals on Form 1095-B.  Employers generally are not required to perform minimum essential coverage reporting although, as discussed in this prior post, there are circumstances under which it is required.

The extended deadlines are hard deadlines to which the IRS will not apply automatic and permissive extensions of time that would otherwise be available. Notice 2016-4 also functions as the Service’s response to any pending extension requests, which will not be formally granted.  Reporting penalties will apply for failure to timely file returns or furnish statements but the IRS may abate penalties on a demonstration of “reasonable cause”; in this regard the employer’s “reasonable efforts” to prepare for timely reporting will be taken into account as will efforts to comply for 2016.  Although not exactly clear from the Notice it would appear that the IRS is still offering penalty relief for timely filed and/or furnished but incomplete or incorrect returns and/or statements, where the filer can show that it made good faith efforts to provide complete and correct information.    Further clarification on that point would be helpful.

As has often been the case with ACA relief, this extension is offered so close to the original compliance deadlines that some ALEs may not need or even be operationally able to take full advantage of it, and the Notice makes clear that the IRS will be prepared to accept ACA returns beginning in January 2016. However even those ALEs that had already invested substantial time and money in fulfilling the original reporting and statement deadlines were struggling with the complexity of the forms and reporting codes, and the extension will allow for a less frenzied and hopefully more accurate reporting process. The extension will be even more welcome to the many employers who qualified for pay or play relief applicable to ALEs with 50 to 99 full-time employees, including full-time equivalents, and who may only now be learning of their 2015 reporting duties.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Employer Shared Responsibility, Health Care Reform, Health Reimbursement Accounts, Minimum Essential Coverage Reporting, PPACA

IRS Offers Limited Transition Relief for Certain Premium Reimbursement Plans

On February 18, 2015 the IRS issued Notice 2015-17 which provides limited transition relief from $100 per day, per employee excise taxes under Internal Revenue Code § 4980D that otherwise would apply in 2014 and 2015 to certain arrangements under which employers subsidize individual health insurance coverage, whether through reimbursing employees for premiums paid, or paying them directly to the carrier.  The guidance, which was issued with the support of the Departments of Labor and Health and Human Services, refers to these arrangements as “employer payment plans.”  The main problem that employer payment plans have is that they generally constitute “group health plans” for ACA purposes, but unless they are paired or “integrated” with ACA-compliant group health coverage they fail to meet ACA market reform requirements, including the requirement to cover preventive care, and the prohibition on an annual dollar limits.  I have attached an updated chart of “Disallowed Pay or Play Tactics” to reflect the transition guidance; this prior post discusses the chart in its original form.  The main takeaway points are listed below; please note in all regards that a “group health plan” is one that covers 2 or more active employees:

  • Employers that are not “Applicable Large Employers” (ALEs) will not be subject to excise taxes in relation to an employer payment plan that reimburses employees on a pre-tax basis for individual health insurance premiums (or pays the premium directly) that is maintained in 2014, or is maintained between January 1 and June 30, 2015.
    • For the relief to apply in 2014 the employer must not be an ALE for 2014, which means that they did not employ 50 or more full-time employees, including full-time equivalents (FT/FTE), on average, based on any period in 2013 of at least 6 consecutive months.
    • For the relief to apply from January 1 – June 30, 2015, the employer must not be an ALE for 2015, which means that they did not employ 50 or more FT/FTE employees, on average, based on any period in 2014 of at least 6 consecutive months.
    • Note that this is “transition” relief which implies that the employer payment plan predated the guidance issued on February 18, 2015.
  • There is no transition relief for employers that are Applicable Large Employers maintaining pre-tax individual premium reimbursement plans.  They are subject to the excise tax for 2014 and 2015 and must pay and report it on IRS Form 8928.
  • Post-tax reimbursement or payment of individual health premiums remains a non-ACA-compliant employer payment plan that is subject to excise taxes.  No transition relief applies.
  • However, no excise taxes will apply if an employer simply increases employees’ taxable compensation in order for them to pay for individual health premiums, without conditioning the extra compensation in any way on payment for premiums.  An employer may communicate with employees about health exchange coverage and premium tax credits without violating this rule.
  • Until further notice from the IRS, an arrangement that pays directly for an individual health policy in the name of a 2% or greater S-Corporation shareholder, or reimburses the shareholder for premium costs, is not subject to excise taxes as a non-ACA compliant employer payment plan.   The IRS plans to issue further guidance on the impact of ACA market reform provisions on these arrangements, and on federal taxation of health benefits to 2% S-Corporation shareholders generally.

Disallowed Tactics 2015 FINAL

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Filed under Affordable Care Act, Benefit Plan Design, Employer Payment Plans, Health Care Reform, Health Reimbursement Accounts, PPACA, Preventive Services