Update: The 21st Century Cures Act was signed into law on December 13.
The U.S. Senate has approved the 21st Century Cures Act, agreeing to the House amendments to the Act. The bill contains, among numerous other provisions, a provision (Act Section 18001) that will exempt certain small business health reimbursement arrangements (HRAs), including those reimbursing private insurance premiums, from the $100 per day penalty for a non-compliant group health plan provided by adding a new exception to IRC §9831. The President has announced that he will sign the bill.
In Notice 2013-54 the IRS held that an employer that reimburses individual insurance policies would generally be found to have a group health plan that failed to comply with the requirements of the Affordable Care Act. Under IRC §4980D an employer operating a non-compliant plan would be subject to a $100 penalty per day per affected employee for the period the plan was operated.
Congress has now passed a bill that would exempt certain small employers from this provision, allowing the employer to reimburse private plan premiums of their employees. But the plan would need to meet certain conditions.
A program that meets the exemption requirements is described as a “Qualified Small Employer Health Reimbursement Arrangement.” [IRC §9831(d)(2)] Such a program must be offered on the same terms to all eligible employees of the eligible employer. As well the program must meet the following requirements:
- The arrangement is funded solely by an eligible employer and no salary reduction contributions may be made under such arrangement,
- The arrangement provides, after the employee provides proof of coverage, for the payment of, or reimbursement of, an eligible employee for expenses for medical care (as defined in section IRC §213(d)) incurred by the eligible employee or the eligible employee's family members (as determined under the terms of the arrangement), and
- The amount of payments and reimbursements described in clause (ii) for any year do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee).
Certain insurance related variations will not cause the arrangement to be deemed to be offered on different terms to the various employees. Specifically, IRC §9831(d)(2)(C) provides:
(C) CERTAIN VARIATION PERMITTED. -- For purposes of subparagraph (A)(ii), an arrangement shall not fail to be treated as provided on the same terms to each eligible employee merely because the employee's permitted benefit under such arrangement varies in accordance with the variation in the price of an insurance policy in the relevant individual health insurance market based on --
(i) the age of the eligible employee (and, in the case of an arrangement which covers medical expenses of the eligible employee's family members, the age of such family members), or
(ii) the number of family members of the eligible employee the medical expenses of which are covered under such arrangement.
The variation permitted under the preceding sentence shall be determined by reference to the same insurance policy with respect to all eligible employees.
The dollar limits provided above must be prorated based on the number of months an individual is covered under the arrangement for any employee not covered for the entire year. The dollar limits will also be adjusted for inflation in $50 increments for years beginning after 2016.
“Eligible employees” would have the same meaning (and exclusions) as provided for self-insured medical reimbursement arrangements found in IRC §105(h)(3)(B) except instead of a three year waiting period there would be only a ninety day period. Thus such programs could exclude:
- Employees who have not completed 90 days of service;
- Employees who have not attained age 25;
- Part-time or seasonal employees;
- Employees not included in the plan who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the IRS finds to be a collective bargaining agreement, if accident and health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers; and
- Employees who are nonresident aliens and who receive no earned income from the employer which constitutes income from sources within the United States.
Part time and seasonal employees for this purpose are defined by Reg. §1.105-11(c)(2)(iii)(C) as follows:
Part-time employees whose customary weekly employment is less than 35 hours, if other employees in similar work with the same employer (or, if no employees of the employer are in similar work, in similar work in the same industry and location) have substantially more hours, and seasonal employees whose customary annual employment is less than 9 months, if other employees in similar work with the same employer (or, if no employees of the employer are in similar work, in similar work in the same industry and location) have substantially more months. Notwithstanding the preceding sentence, any employee whose customary weekly employment is less than 25 hours or any employee whose customary annual employment is less than 7 months may be considered as a part-time or seasonal employee.
To be an employer eligible to offer this program the employer cannot be an applicable large employer under the ACA (as defined at IRC §4980H(c)(2)) and the employer cannot offer a group health plan to any of its employees.
Employees must be covered under minimum essential coverage for a month in order for any amounts received under the program to be excludable from income. [IRC §106(g)] The employee also will not be eligible for a health insurance credit for any month the employee is covered under the arrangement so long as the arrangement provides “affordable coverage.” [IRC §36B(c)]
The arrangement shall be treated as providing affordable coverage if:
- The excess of --
- The amount that would be paid by the employee as the premium for such month for self-only coverage under the second lowest cost silver plan offered in the relevant individual health insurance market, over
- 1/12 of the employee's permitted benefit (as defined in section 9831(d)(3)(C)) under such arrangement, does not exceed --
- 1/12 of 9.5 percent of the employee's household income.
The employer is required to give the employee notice under this program within 90 days of the beginning of the tax year or from the date the employee shall be eligible to participate in the program. The notice must contain the following:
- A statement of the amount which would be such eligible employee's permitted benefit under the arrangement for the year.
- A statement that the eligible employee should provide the information described above to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit.
- A statement that if the employee is not covered under minimum essential coverage for any month the employee may be subject to tax under section 5000A for such month and reimbursements under the arrangement may be includible in gross income." [IRC §9831(d)(4)]
If an employer fails to give the required notice, a penalty of $50 per employee per incident (with a maximum penalty of $2,500 per calendar year) applies unless the employer can show the failure is due to reasonable cause and not willful neglect. [IRC §6652(o)]
The new rule is effective for tax years beginning after December 31, 2016. The relief provided in Treasury Notice 2015-17 will be treated as applying to any plan year beginning on or before December 31, 2016. Presumably this means the $100 penalty will not apply (that is, the June 30, 2015 date for the end of relief would not apply), but the law is not entirely clear on that point.