By Anne E. Murray, Samuel S. Choy, Leah Morgan Singleton, Stacey L. Stewart and Suzannah W. Gill, of McKenna Long & Aldridge LLP
The health care reform law enacted in March 2010 contains a number of far-ranging changes, including nondiscrimination rules that could restrict the value of employer-paid premiums for highly compensated executives.
Many employment and severance/separation agreements provide that the company will pay all or a portion of health care premiums (including COBRA premiums) for a former or current executive at a level that is more favorable than the level provided to other employees. If your agreements make this promise, this could be dangerous.
For purposes of this alert, an executive includes any individual who is one of the five highest paid officers, a 10 percent or more shareholder, or among the highest paid 25 percent of employees. Certain exceptions may apply. In addition, certain limited grandfathering exceptions may be available under health care reform.
• Self-insured plans. For self-insured health plans, the long-standing rule is that company-paid premiums for executives must be taxed to the executive on IRS Form W-2 or the executive will be taxed on the full value of medical benefits he or she receives. This could be huge if the executive or a covered dependent is or becomes ill.
• Fully insured plans. Historically, fully-insured health plans were not subject to this same rule. However, for plan years beginning on or after Sept. 23, 2010, a similar (not the same) rule will apply to fully-insured plans. If a company pays all or a portion of an executive’s non-COBRA premium payments, the company may be penalized $100 per day per executive who receives these premium payments (with a maximum penalty for an unintentional failure of $500,000 per taxable year). That’s $36,500 per year in penalties that the company could owe the IRS for each executive.
It has not yet become clear whether the executive would incur taxes as well. A limited exception exists for certain companies employing 50 or fewer employees. In addition, in the limited situation where an employer provides company-paid COBRA premiums, it still appears possible for the company to avoid the $100-per-day penalty if it structures the payment as a taxable reimbursement, not a direct payment.
What to Do
If the company pays a greater portion of health care premiums for current or former executives, it might need to restructure these types of arrangements, which likely includes amending employment or severance agreements before the new rules go into effect.
Ann E. Murray and Samuel S. Choy are partners in the Atlanta-based law firm McKenna Long & Aldridge LLP. Ms. Murray focuses her practice on helping companies attract and retain their workforces by offering attractive benefits programs and rewards. Mr. Choy’s practice focuses on counseling employers on virtually every aspect of benefits plans, including design, operation and compliance of qualified and nonqualified retirement plans, employer-sponsored life, health and other welfare benefit plans, severance programs, and equity compensation plans. Leah Morgan Singleton, Stacey L. Stewart and Suzannah W. Gill are associates at the firm, focusing on employee benefits and executive compensation.
© 2010 McKenna Long & Aldridge LLP. All Rights Reserved.
Reposted with permission.
This article should not be construed as legal advice.
Non-Discrimination in Insured Health Care Plans, No More Executive Health Benefit Plans?, BNA Pension & Benefits Blog, September 2010
Extension of Self-Insured Health Plan Nondiscrimination Requirements to Nongrandfathered Insured Plans, Giller & Calhoun LLC, 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page