All of the tax professionals facilitating webinars and seminars brought up the impact the ACA will have on employer nontaxable reimbursements to employees for health insurance and out-of-pocket medical expenses. Whether a plan was an out-of-pocket medical expense reimbursement plan under IRC (Internal Revenue Code) section 105, a health insurance reimbursement arrangement under IRC section 106, or a Cafeteria plan under IRC section 125, traditionally employers in the past have placed caps on the amount they would reimburse employees under any of these plans for obvious reasons; otherwise, an employer would face unlimited liability in the event a covered employee incurs catastrophic medical expenses requiring reimbursement.
Small Employers Could Not Afford the Cost
When the individual mandate under the Affordable Care Act went into effect on January 1, 2014, employers who had these types of medical plans faced a major dilemma; the wording of the ACA removed lifetime caps on medical expense coverage under any health insurance or medical reimbursement plan in order for it to qualify as “minimum essential coverage.” The Treasury Department reinforced this point by issuing Notice 2013-54 right before January 1, 2014; a $100.00 per day per employee penalty would be assessed on any plan under IRC section 105, 106, or 125 that did not meet the requirements under the ACA for “minimum essential coverage.”
At that point, employers who had these plans had four choices;
- stop reimbursing employees under these plans;
- keep the plan(s) without change and face the huge penalty imposed by the Treasury Department;
- remove lifetime caps on the reimbursement plan and face potential unlimited liability if an employee incurs catastrophic medical expenses;
- or finally, buy a group insurance policy meeting the requirements under the ACA that is tied into, or in addition to the reimbursement plan.
This last option can be prohibitively expensive for employers since, under Oregon law, they are required to pay at least half the cost of group health insurance for their employees. Frankly, many of the small employers we work with simply could not afford the cost.
Temporary Relief
For months, there were rumors circulating that the IRS was going to extend the compliance deadline, modify, or limit the effects of Notice 2013-54 on these reimbursement plans. In spite of that, we advised our clients to either buy a group health plan, or discontinue reimbursing for medical insurance and out of pocket medical rather than to place them at risk for the $100.00 a day per employee penalty.
Then, on February 17, 2015, the IRS issued notice 2015-17 which grants temporary relief from the penalty for some businesses. Businesses with plans under IRC section 105, 106, or 125 who had two or more employees (employers with only one employee are not subject the penalties under Notice 2013-54) were given until June 30, 2015 to come into compliance with the ACA. This notice only granted temporary relief, but still, something is better than nothing. However, this temporary relief only applies to companies that are not “applicable large employers,” i.e. less than 50 employees.
Is Permanent Relief Possible?
The best part of Notice 2015-17 is the relief granted to 2% or more shareholders of Subchapter S Corporations reimbursing themselves for health insurance in order to claim the self-employed health insurance adjustment to income on their individual returns. These shareholders can continue to reimburse themselves for health insurance through the end of December 31, 2015, without paying a penalty. Is the IRS signaling that they may provide more permanent relief for these 2% shareholders? Stay tuned.
Disclaimer: Any accounting, business or tax information or advice contained in this blog is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, ABTS, Inc. would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.