This article is critical reading for employers who reimburse their employees for their individual health insurance policies or offer their employees a medical reimbursement account or health reimbursement account. There is a potential $100 penalty per day per employee for employers.
In late 2013 as part of the Affordable Care Act, the IRS issued guidance imposing requirements on employer-provided group health plans. These requirements apply to all employer-provided group health plans, including those provided by small employers with less than 50 employees. Additionally, these requirements have not been extended by the one or two year delays in the mandate for large employers to provide health insurance.
The requirements are numerous, but of importance here is that employer health plans cannot impose annual dollar limits on certain health benefits.
Where employers reimburse employees for their individual health insurance premiums, the IRS treats the reimbursement arrangement as a group health plan subject to an annual limit equal to the premium cost that is being reimbursed.
This same requirement affects health reimbursement accounts and medical reimbursement accounts that have an annual limit.
The penalty for having such an arrangement is $100 per day per employee (i.e., $36,500 per employee per year).
Penalty Does NOT Apply to One-Employee Plans
The requirement for unlimited benefits does not apply to one-employee medical reimbursement plans or where the employer reimburses only one employee for his/her individual health policy.
Penalty Does NOT Apply to Ancillary Benefit Plans
Medical reimbursement plans are still permitted for ancillary benefits such as dental and vision coverage, long term care, and disability coverage because these are not part of essential health benefits that require unlimited dollar coverage.
Penalty Does NOT Apply to Integrated Medical Reimbursement Accounts
A medical reimbursement plan that is coordinated with insurance coverage, so that the combined arrangement provides an Affordable Care Act approved group health plan, is permitted if the benefits provide coverage in totality that meets Affordable Care Act requirements. A key condition of these integrated arrangements is that each participant in the medical reimbursement plan must be enrolled in group health insurance coverage.
How to Avoid the Penalty
Employers can also avoid the penalty by treating the reimbursement of individual health insurance premiums or medical expenses as taxable income to the employee. This will not be a popular decision with employees, but aside from discontinuing the reimbursement arrangement, it may be the best bet.
The penalty will not apply if the employer comes into compliance with these requirements within 30 days of discovering non-compliance with the requirements and the employer had reasonable cause for not being in compliance. Considering that there has been little or no guidance on this issue, the IRS should be generous in granting this relief, but we will see.
If the employer had reasonable cause for not being in compliance the penalty is limited to 10% of amounts paid for group health insurance.
It is possible that the IRS will delay this requirement, but at this point in the year, the better course of action for employers will be to either treat the reimbursements as taxable income to the employee or terminate the plans.
If you have any questions on how this applies to you, please feel free to give us a call.