MAY 29, 2014

The Internal Revenue Service has clarified that employers will not escape taxes and penalties under the Affordable Care Act if they choose to send their employees to the exchanges and reimburse them with tax-free dollars for premiums in lieu of offering an employee-sponsored health insurance plan.

In a frequently-asked-questions post to its website this month, the IRS now says such arrangements are considered, under IRS Notice 2013-54, employer payment plans that qualify as group health plans and are subject to the market reforms. The IRS has also clarified that such arrangements cannot be integrated with individual policies to satisfy the employer mandate.

The IRS clarification is directed as much at benefit advisers and agents as it is at employers, since, according to one industry lawyer, the FAQ was prompted by consultants and brokers selling pre-tax reimbursement plans to employers in defiance of the IRS’ direction.

The FAQ “informs employers they cannot sponsor a reimbursement arrangement that reimburses on a pre-tax basis an employee’s purchase of an insurance plan both inside and outside of the exchange,” says Christopher Condeluci, a benefits attorney with Venable LLP.

He adds: “It puts employers on notice that if they buy an arrangement like this from a consultant or adviser they will be subject to an excise tax; and it informs benefit advisers, brokers, agents and consultants that it would be in their best interest not to recommend these types of policies.”

An employer is permitted to give contributions, however, in the form of taxable wages, to help an employee purchase an individual market plan, Condeluci says.

Employers with fewer than 50 full-time equivalent employees are not subject to the employer mandate and, therefore, will not be penalized for discontinuing a health plan and giving their employees taxable wages to purchase an individual market plan. If the employee is eligible based on income they could also access a premium subsidy.

Large employers that fail to offer coverage may be subject to hefty fines under the ACA starting in 2015. The employer mandate for companies with 50 to 99 workers doesn’t become effective until 2016.

On Sept. 13, 2013, the IRS issued Notice 2013-54, which explains how the ACA market reforms apply to certain types of group health plans, including health reimbursement arrangements, health flexible spending arrangements and certain other employer health care arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy.

The IRS notice doesn’t affect private exchanges.