Premium Payment Plans Nixed for Small Employers, IRS Says

Transition relief offered to small employers currently reimbursing exchange-plan premiums

By Stephen Miller, CEBS February 20, 2015

Update: Enactment of the 21st Century Cures Act in December 2016 allows small businesses use a new kind of HRA, known as a "qualified small employer health reimbursement arrangement" (QSEHRA), to fund employees purchasing individual plans on the open market. See the SHRM Online article "New Law Lets Small Employers Use Stand-Alone Health Reimbursement Arrangements."

Original article below

Even small employers not subject to the Affordable Care Act’s (ACA) coverage mandate can’t reimburse employees for nongroup health insurance coverage purchased on a public exchange, the Internal Revenue Service confirmed. But small employers providing premium reimbursement in 2014 are being offered transition relief through mid-2015.

IRS Notice 2015-17, issued on Feb. 18, 2015, is another in a series of guidance from the IRS reminding employers that they will run afoul of the ACA if they use health reimbursement arrangements (HRAs) or other employer payment plans—whether with pretax or post-tax dollars—to reimburse employees for individual policy premiums, including policies available on ACA federal or state public exchanges.

This time the warning is aimed at small employers—those with fewer than 50 full-time employees or their equivalent (in part-time workers’ combined hours). While small organizations are not subject to the ACA’s “shared responsibility” employer mandate to provide coverage or pay a penalty, if they do provide health coverage it must meet a range of ACA coverage requirements.

“The agencies have taken the position that employer payment plans are group health plans, and thus must comply with the ACA’s market reforms,” noted Timothy Jost, J.D., a professor at the Washington and Lee University School of Law, in a Feb. 19 post on the Health Affairs Blog. “A group health plan must under these reforms cover at least preventive care and may not have annual dollar limits. A premium payment-only HRA or other payment arrangement that simply pays employee premiums does not comply with these requirements. An employer that offers such an arrangement, therefore, is subject to a fine of $100 per employee per day. (An HRA integrated into a group health plan that, for example, helps with covering cost-sharing is not a problem).”

Transition Relief

The notice provides transition relief for small employers that used premium payment arrangements for 2014; small employers also will not be subject to penalties for providing payment arrangements for Jan. 1 through June 30, 2015. These employers must end their premium reimbursement plans by that time. This relief does not extend to stand-alone HRAs or other arrangements used to reimburse employees for medical expenses other than insurance premiums.

No similar relief was given for large employers (those with 50 or more full-time employees or equivalents) for the $100 per day per employee penalties. Large employers are required to self-report their violation on the IRS’s excise tax form 8928 with their quarterly filings.

“Notice 2015-17 recognizes that impermissible premium-reimbursement arrangements have been relatively common, particularly in the small-employer market,” states a benefits brief from law firm Spencer Fane. “And although the ACA created “SHOP Marketplaces” as a place for small employers to purchase affordable [group] health insurance, the notice concedes that the SHOPs have been slow to get off the ground. Hence, this transition relief.”​

“By excluding more traditional HRAs (i.e., HRAs that reimburse expenses other than premiums) from the transition relief, the IRS makes it clear that the Notice 2013-54 prohibitions apply to all arrangements that pay for or reimburse individual market health premiums,” observes an analysis by law firm Alston & Bird LLP. “Many had previously taken an erroneous position that HRAs that reimburse solely individual market premiums were allowable under the prior Notice. Presumably, the limited transition relief is an acknowledgment of the confusion on this issue.”

Subchapter S Corps.

The notice states that Subchapter S closely held corporations may pay for or reimburse individual plan premiums for employee-shareholders who own at least 2 percent of the corporation. “In this situation, the payment is included in income, but the 2-percent shareholder can deduct the premiums for tax purposes,” Jost explained. “The 2-percent shareholder may also be eligible for premium tax credits through the marketplace [public exchange] if he or she meets other eligibility requirements.”

Medicare Premium Reimbursement

The notice allows employers to pay Medicare Part B or D premiums for retired employees in retiree-only plans, as retiree-only plans are not subject to the ACA market reforms. Employers can only pay Medicare premiums for active employees “if the employer payment plan is integrated with a group health plan,” Jost pointed out. For instance, the associated group plan must offer “minimum value” by covering (without cost-sharing) at least 60 percent of the actuarial value of services provided by physicians and hospitals. The premium payment plan must be limited to Medicare Part B or D premiums and excepted benefits, including Medigap premiums.

“Employers offering such an arrangement remain subject to other legal requirements, such as the Medicare as secondary payment requirements,” Jost noted.


Employers can pay for some or all of the expenses of employees covered by Tricare—a Department of Defense program that provides civilian health benefits for military personnel (including some members of the reserves), military retirees and their dependents—if, again, the payment plan is integrated with a group health plan that meets ACA coverage requirements.

Higher Pay Is Still OK

One option that the IRS will allow employers is to simply increase an employee’s taxable wages in lieu of offering health insurance. “As long as the money is not specifically designated for premiums, this would not be a premium payment plan,” said Jost. “The employer could even give the employee general information about the marketplace and the availability of premium tax credits as long as it does not direct the employee to a specific plan.”

But if the employer pays or reimburses premiums specifically, “even if the payments are made on an after-tax basis, the arrangement is a noncompliant group health plan and the employer that offers it is subject to the $100 per day per employee penalty,” Jost warned.

Some also contend that employers can use a payroll vendor to allocate post-tax cash payments to an insurance carrier for monthly premiums, as long as the payment is not conditioned on the purchase of health care insurance. Employers with 50 or more full-time employees/equivalents would still face penalties under the employer mandate if they do not offer compliant group coverage, however.

“Small employers now have just over four months in which to wind down any impermissible premium-reimbursement arrangement,” the Spencer Fane brief notes. “In its place, they may wish to adopt a plan through a SHOP Marketplace. Although individuals may enroll through a Marketplace during only annual or special enrollment periods, there is no such limitation on an employer’s ability to adopt a plan through a SHOP.”

Public Exchange vs. Employer Coverage:
What's Best for Low-Income Employees?

Workers who are offered “affordable” employer coverage cannot receive government tax credits or cost-sharing subsidies to purchase nongroup coverage on a federal or state public exchange. But “affordability” is not necessarily so affordable; it means the employee-paid share of premiums for single coverage can reach but not exceed 9.5 percent of the worker’s W-2 wages, even if the worker is purchasing family coverage. Many employees could get a better deal on a public exchange, according to Christine Eibner, a senior economist at the Rand Corp., in a Feb. 12 post on The Rand Blog.

“Approximately 17 million workers with access to employer insurance would qualify for cost-sharing subsidies if they were allowed to receive federal benefits on the exchanges,” Eibner wrote. ”On the exchanges, a person just above the poverty level, with $17,500 of annual income, would pay about $700 a year towards health insurance premiums, and out-of-pocket spending would be capped at $2,250, for a maximum annual spending amount of $2,950. The same individual could face premium contributions as high as $1,660 under employer coverage, and out-of-pocket spending could reach $6,600, the highest annual spending allowed under the ACA.”

As a U.S. Supreme Court ruling in King v. Burwell approaches, “there is likely to be increased discussion about potential modifications to the ACA's tax credit structure,” noted Eibner. “Policymakers might consider whether there are opportunities to level the playing field for low-income workers, regardless of whether their employers offer insurance.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Articles:

Affordable Care Act: Coverage Terms, SHRM Online Benefits, January 2015

Employees May Miss Out on Subsidies Due to Uncertainty About Job-Based Coverage, SHRM Online Benefits, December 2014

Premium Reimbursement for Public Exchanges Not Permitted, DOL Confirms, SHRM Online Benefits, November 2014

IRS Prohibits Payment Plans for Premiums, SHRM Online Legal Issues, May 2014

Regs Limit Use of HRAs for Exchange-Purchased Coverage, SHRM Online Benefits, January 2014

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