Owners Who Reimburse Employees for Individual Policies
Do you have clients who reimburse employees for individual policies?
If you do, then your client may be in violation of recently issued guidance Notice 2013-54. Until recently, it's been unclear whether such a practice is in compliance with the Affordable Care Act (ACA). The IRS and Department of Labor (DOL) interprets such a practice as creating its own group health plan. Being a group health plan, it must not provide an annual limitation on benefits. The amount paid for insurance is deemed to be the annual limitation, thus, failing the requirements.
Although such an arrangement is still tax-free under Rev. Rul. 61-146, it is subject to a penalty under §4980D, a penalty not advertised as much as the "pay or play" penalty under §4980H (the employer mandate). This penalty imposes an amount of $100 per day, per participant.
As of January 1, 2014, the employer needs to change the way they offer insurance if they continue to do so.
SECTION 4980D PENALTIES: Premium reimbursements under Rev. Rul. 61-146 will fail to meet the maximum lifetime benefit and is considered a group health plan. If the company has at least two employee participants, even if the plan is not discriminatory, it will be subject to §4980D.
Sole S corp. shareholders (no employees) do not need to be considered because §9831 creates an exception for a company with less than two participants who are current employees. They are not subject to Chapter 100 of the IRC (§9801-§9834), meaning they may continue to reimburse expenses for the sole shareholder. Sole proprietors without employees are also not subject to these penalties.
However, if your client has employees, the client can no longer keep this practice. Because it's considered to be a violation of the annual limit, your client can be subject to a $100/day X number of participants under §4980D. It appears the exception for small employers under this code section is to be narrowly construed to only give a break if the insurance company fails compliance, not the deliberate attempt by the employer.
The IRS clarified in Notice 2013-54 this practice is not allowed. Although there is still ambiguity to which some health benefit companies believe they can get around this, if the IRS continues in this direction, reimbursing for premiums will create penalties for your clients.
Participants are not defined, however, regulation §54.9831-1(d) accepts the Department of Labor definition of a group health plan to include partners as "employees" and the partnership the "employer" and define it as a group health plan. This is contrary to the definition of a group health plan under ERISA. Under ERISA a participant can only be an employee who is part of the plan, but it cannot consist solely of owners.
Presumably, a sole owner of a business can simply pay for his or her own insurance and exclude other employees and not be subject to the penalty. However, if there are multiple owners or employees, the business cannot pay for all their insurance without a group health plan.
The IRS may issue further guidance to hopefully clarify if an owner can simply pay for his own insurance and further clarify when the penalty does apply and when it does not.