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Even small employers notsubject 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 equivalent workers. While small organizations are not subject to the ACA’s “shared responsibility” employer mandate to provide coverage or pay a penalty (aka Pay or Play), 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).”
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.”
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 SHOP Marketplace if he or she meets other eligibility requirements.
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 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.
“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.”
Small businesses may participate in several federally facilitated Small Business Health Option Program (SHOP) exchanges – for example, if an employer has offices in different states – but each small employer is limited to establishing one FF-SHOP account per state.
If an employer has worksites in several states, it may (1) establish an account in each state where the company has a primary work location for workers; or (2) it may establish an account in one state and use that to provide health insurance for all members of the group. If it does establish accounts in several states, it must submit a separate report on the participation rate to each FF-SHOP.
An employer is considered to be a small employer eligible for SHOP coverage if its average number of employees is 50 or fewer. Employers participating in the FF-SHOP must offer coverage to all full-time employees, defined as those working 30 or more hours per week on average.
The SHOP system is a way for employers to help satisfy health reform’s mandate for individuals to obtain coverage or pay extra taxes. Furthermore, most (34 out of 50, not including the District of Columbia) states will house (but not run) FF-SHOP exchanges.
In March 2013, the CMS released final rules that described the 70% participation requirement for small employers. Under those rules, insurers may deny coverage to small employers that fail to meet the minimum participation requirements.
Insurers may impose a 70% workforce participation requirement for small employers to partake in FF-SHOP coverage. In the first open enrollment period (Nov. 15 through Dec. 15, 2013), however, workers can obtain coverage on an interim basis even if an employer falls below the minimum participation amount, according to CMS. On renewal one year later, however, insurers will be able to invoke the participation requirement. State law may impose a different minimum participation requirement. Small employers are required to keep records of coverage held by workers to substantiate minimum participation and to ensure that workers do not have double coverage.
Here are a few other policies small employers will want to know when considering group coverage with an FF-SHOP:
One of the ways in which the Affordable Care Act helps bring down costs for small employers is through the tax credit available to eligible small businesses that provide health care insurance to their employees. The credit significantly offsets the cost of providing insurance and with the 2012 corporate tax filing deadline rapidly approaching (March 15th), you don’t want to let this valuable tax break pass you by.
What is the Small Business Health Care Tax Credit?
Currently the maximum tax credit is 35% for small businesses employers and 25% for small tax-exempt employers (i.e. charities and non-profits). This percentage applies to tax years 2010 through 2013. Even better, in 2014 the credit will increase to 50% for eligible small business employers and up to 35% for tax-exempt employers through the new Small Business Health Options Program (SHOP) Marketplace (also known as the Exchange).
The credit can also be carried back or forward to other tax years. Since the amount of the health insurance premium payments are more than the total credit, eligible businesses can still claim a business expense deduction for the premiums in excess of the credit. That equals out to both a credit and a deduction for employee premium payments.
Who Qualifies for the Small Business Health Care Tax Credit?
To qualify for the credit, you must meet the following criteria:
To help determine whether you qualify for the credit, follow this step by step guide from the IRS.
How to Claim the Credit
You must use the IRS Form 8941 to calculate the credit.. Then include the credit amount as part of the general business credit on your income tax return. If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T. You must file the Form 990-T in order to claim the credit even if you do not ordinarily do so. Remember, you may be able to carry the credit back or forward. Be sure to talk to your tax advisor for more assistance.
Released 4/2/13, the Obama Administration is delaying a key portion of the federally-run SHOP Marketplace, in which small businesses can offer a choice of health plans to their employees through the public marketplace. As a result, small businesses will be limited to offering a single plan through the federally-run SHOP Marketplace until 2015.
The multi-place choice option was supposed to become available to small employers via the federally-run SHOP Marketplace in January 2014. But administration officials said they would delay it until 2015 in the 33 states where the federal government will be running the SHOP insurance marketplaces.
Many feel this delay will “prolong and exacerbate healthcare costs that are crippling 29 million small businesses” according to a recent NY Times article.
What is the SHOP Marketplace?
As part of the Affordable Care Act (ACA), states are required to provide a Group Market Health Insurance Exchange for businesses (called the Small Business Health Options Program or “SHOP”). The SHOP Marketplace is essentially a public group health insurance exchange that will be available for small businesses starting January 1, 2014. The new program was designed to simplify the process of finding health insurance for small businesses and applying any applicable tax credits that an individual may qualify for.
As with the individual health insurance marketplace, all states have three options for offering a SHOP marketplace: (1) create their own state-run marketplace, (2) join a federal-state partnership, or (3) default to the federally-run SHOP marketplace. As mentioned above, 33 states are expected to default to the federally-run marketplace.
Initially, the SHOP marketplaces are for businesses with up to 100 employees. However, states can limit participation to businesses with up to 50 employees until 2016, so eligibility will ultimately vary from state to state.