In Information Letter IRS Confirms That a Plan Covering a Single Employee May Reimburse Private Insurance Premiums Without Violating ACA

In Information Letter 2016-006 the IRS reaffirmed that an employer does not run afoul of the penalties imposed on employer plans that reimburse private insurance coverage if such a plan covers only a single employee.

The letter was written in response to an inquiry by Representative Tom Price on behalf of a constituent asking whether he could continue to reimburse the medical insurance premiums of his only employee without running afoul of the Affordable Care Act (ACA).  More specifically the issue is avoiding the $100 per day penalty under IRC §4980D for having a plan that was in violation of market reform rules for employer sponsored group plans.

In Notice 2013-54 the IRS had held that generally an employer that reimburses employees for plans purchased outside of the group health insurance market (that is, individual health insurance plans) would be in violation on the ban on theannual and lifetime limitation on benefits under a plan, since the payment of premiums (which would be limited) could only be considered part of a plan if the insurance plan whose premiums were being paid was offered on the group plan market.

However, as the Notice pointed out,  some plans are exempted.  More specifically, as this letter points out, “[t]he ACA market reform rules do not apply to a group health plan if the plan has less than 2 participants who are active employees. See Internal Revenue Code section 9831(a)(2). Thus, if * * * provides health coverage to a single employee by reimbursing that employee's individual health policy premiums, the arrangement is not subject to the ACA.”

The following summarizes the issues involved with such an employer program reimbursing private insurance premiums (assuming the program requires strict substantiation of the payment in accordance with Revenue Ruling 61-146):

Advisers should note that establishing such a plan is not without some risks.  The most significant is to make sure the sponsor understands the strict “one employee” limit on the program.  If the employer adds another employee this arrangement will no longer work to avoid imposition of the $100 per day penalty, thus the employer would be forced to discontinue such reimbursement or revert to the use of insurance found on the group market, normally by obtaining such insurance itself.

As well, it may well be risky to attempt a “carve out” plan that provides this benefit for one employee while continuing to provide standard group coverage to other employees.  The risk in that situation is that the IRS would consider the employer to not have two plans, but rather a single plan with two options (one giving coverage of group premiums while the other covers non-group premiums) that would again open up the $100 per day penalty.

But this exemption does provide relief for situations (such as one person service corporations) where there simply never will be a second employee.  In such cases the employee can obtain an individual policy with the employer paying for the premium.