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Small Business Employee Benefits and HR Blog

What is an Employer Payment Plan?

On May 13, 2014, the IRS posted a new FAQ on Employer Health Care Arrangements. The FAQ discusses the rules for “Employer Payment Plans,” as outlined in IRS Notice 2013-54. In order to understand the application of the IRS FAQ (the “FAQ”) and IRS Notice 2013-54 (the “Notice”), it is important to understand the definition of an Employer Payment Plan.Employer_Payment_Plan_-_What_is_It

What is an Employer Payment Plan?

The term “Employer Payment Plan” refers to an arrangement under which an employer treats its direct contributions (either through payment or reimbursement) to individual health insurance premiums as tax-free (i.e. excludable from income) under Section 106 of the Internal Revenue Code (the “IRC”).

Per the definition of Employer Payment Plans in IRS Notice 2013-54, the 1961 Revenue Ruling 61-146 holds that if an employer reimburses an employee’s substantiated premiums for individual health insurance, the employer’s contributions are excludable from the employee’s gross income under IRC Section 106.

According to the FAQ and the Notice, Employer Payment Plans are considered to be group health plans subject to ACA market reforms including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Because Employer Payment Plans do not meet these requirements outlined in IRS Notice 2013-54 (e.g. Employer Payment Plans do not cover preventive care as mandated under Public Health Service Act Section 2713), the employer may be subject to a $100/day excise tax per applicable employee under IRC Section 4980D.

Is there an alternative to an Employer Payment Plan that allows tax-free reimbursement of individual health insurance costs?

Yes. A Self-insured Medical Reimbursement Plan (e.g. a Healthcare Reimbursement Plan), as defined in IRC Section 105, is an alternative to an Employer Payment Plan.

Per IRC Section 105, a Self-insured Medical Reimbursement Plan is a plan offered by an employer that reimburses employees for medical care (including health insurance premiums). With this approach, the employer makes contributions to the Self-insured Medical Reimbursement Plan (not directly to individual policies) and employees use the plan to reimburse their out-of-pocket medical care costs (including health insurance premiums). The reimbursements (or distributions from the plan) are then excludable from employees’ taxable income under IRC Section 105.

If I currently offer an Employer Payment Plan, what do I need to do to switch to a Self-Insured Medical Reimbursement Plan that complies with IRS Notice 2013-54?

In order to switch to a Self-Insured Medical Reimbursement Plan, you will need to complete the following:

  • Terminate the Employer Payment Plan (if there is a formal plan in place).

  • Set up the required Section 105 Plan Documents.

  • Ensure compliance with IRS, HIPAA and ERISA rules.

  • Ensure the plan is designed in compliance with the new market reforms (ACA PHS Act rules), including the annual limit and preventive care rules outlined in IRS Notice 2013-54.

  • Educate and onboard employees.

Due to the complexity of the new market reforms and federal regulations, many employers prefer to contract with a third party to help ensure compliance and to avoid unnecessary tax penalties.

The Comprehensive Guide to the Small Business HRA

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