Employer Payment Plans and Individual Market Premiums
Reimbursing employees’ individual health insurance premiums seems simple, but under IRS Notice 2013-54 it can be a non-compliant group health plan with a steep daily excise tax. Compliant routes now exist.
What an Employer Payment Plan Is
IRS Notice 2013-54 and the IRS employer health care arrangements page explain the issue.
The Definition
An employer payment plan is an arrangement under which an employer reimburses an employee for some or all of the premiums for an individual market policy, or pays the premium directly. Employers that pay or reimburse employees for individual policies should check how the arrangement is set up. Whether it counts as this type of plan depends on its terms, so ask counsel before continuing. For a summary of the tax and penalty rules, see Reimbursing Individual Health Premiums.
Treated As A Group Health Plan
The IRS says such arrangements are group health plans subject to the ACA market reforms, including the prohibition on annual limits for essential health benefits and the requirement to cover certain preventive care without cost sharing. That classification brings federal requirements that individual coverage reimbursed this way usually cannot satisfy. Employers should have counsel or a benefits adviser review any such arrangement before relying on it.
Cannot Be Integrated
Notice 2013-54 clarifies that these arrangements cannot be integrated with individual policies to satisfy the market reforms, so they fail them. In practice, an employer cannot fix the problem simply by pointing to the employee’s own policy. Employers should ask counsel whether any compliant alternative fits their situation.
The Excise Tax
The arrangement may be subject to an excise tax of $100 per day per applicable employee under section 4980D, which the IRS describes as $36,500 per year per employee. The penalty is calculated per day and per affected employee, so exposure can add up quickly. Employers should speak with counsel or a tax adviser promptly if they find an arrangement like this.
Minimum Tax After Notice Of Examination
Section 4980D sets minimum amounts when failures are discovered after notice of an income tax examination: the lesser of $2,500 or the computed tax, rising to $15,000 where violations are more than de minimis. These amounts are the statutory minimums, and the actual tax could be higher. Employers should not wait for an examination to review the arrangement, and should involve counsel early.
What Is Not Covered
The IRS says an employer payment plan generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. The distinction depends on the details of the arrangement and on the employee’s choice. Employers should have counsel review the exact structure and ask a tax adviser about payroll treatment.
Notice 2015-17 and the Compliant Routes
Congress and the agencies later created structured alternatives.
Notice 2015-17
Describes the same problem: EPPs and HRAs consist of a promise to reimburse up to a certain amount, so they include dollar limits and fail the annual limit and preventive services rules. The guidance applies to both reimbursement-style arrangements and certain stand-alone reimbursement accounts. Employers should ask counsel to compare their arrangement against it and discuss compliant alternatives.
QSEHRA
A qualified small employer HRA, created by statute, is not treated as a group health plan if its conditions are met. See our QSEHRA guide.
ICHRA
An individual coverage HRA lets employers reimburse individual coverage under defined rules, including classes, notice and verification. See the ICHRA and QSEHRA guide.
Excepted Benefit HRA Cannot Do It
An excepted benefit HRA cannot reimburse individual coverage premiums. See excepted benefit HRAs.
Pre-Tax Payroll Is Different
Employees paying for individual coverage with payroll deductions run through a cafeteria plan raise separate questions. Ask counsel. Cafeteria plan rules and individual coverage can interact in complex ways, and the answer may depend on how premiums are paid. A benefits attorney or tax adviser should review before any changes.
Existing Arrangements
If you already reimburse premiums informally, review it now. Informal practices, such as a stipend or a payment for an employee’s own policy, may still count. Gather the facts and ask counsel for a review before making changes or continuing the practice.
How to Review What You Already Do
Many small employers have a legacy arrangement.
List Every Reimbursement
Identify any payment that goes toward an employee’s own insurance policy. Look through payroll, accounts payable and expense reports, and include arrangements made for individual employees. A complete list helps counsel and advisers see the whole picture. Share the list with counsel.
Check Who Gets It
Employees with their own individual policy, spouses, or dependents. Separate employees, spouses and dependents, and note how the amount is determined. The details help counsel judge the exposure and identify which alternatives may be worth discussing. Counsel can use this to size the issue.
Compare To The Compliant Options
QSEHRA or ICHRA may fit your size and goals. These are the arrangements designed to reimburse individual coverage under defined rules. Each has its own eligibility, notice and contribution requirements, so ask a benefits adviser and counsel which fits. Your adviser can model each against your workforce.
Plan The Transition
Choose the effective date and communicate to employees well before the plan year. Give employees time to understand changes and to find replacement coverage. Set a timeline with your adviser, communicate it in writing and avoid mid-year surprises where possible.
Document
Keep written plan terms and employee notices. Keep plan documents, notices, payroll records and the decisions made, along with dates. Good records help show good faith and give counsel what they need if questions arise later. Store everything where counsel can find it.
Ask A Broker
This is exactly the kind of review we do. Send us the details. We can walk through the arrangement, explain the compliant options and coordinate with your counsel or tax adviser. We do not provide legal advice, so you will want counsel involved.
Questions We Get About Employer Payment Plans
Can I reimburse employees for their individual health insurance?
Not through an employer payment plan under Notice 2013-54. The IRS treats it as a non-compliant group health plan. Structured routes such as a QSEHRA or an ICHRA exist, each with its own eligibility rules, so confirm with counsel which fits.
What is the penalty?
An excise tax under section 4980D of $100 per day per applicable employee, described by the IRS as $36,500 per year per employee.
Is giving employees a taxable cash raise the same thing?
The IRS says an arrangement under which the employee may take the amount in cash compensation generally is not an employer payment plan.
What is the compliant alternative for small employers?
A QSEHRA, if you meet its conditions, or an ICHRA.
Can an excepted benefit HRA reimburse individual premiums?
No.
Does the rule still apply?
Notice 2013-54 and the IRS page remain the cited guidance. Confirm the current position with counsel.
Is there a minimum tax?
Section 4980D provides minimum amounts when failures are discovered after notice of examination.
How do I know if mine is an EPP?
If the employer pays or reimburses premiums for an individual policy under a promise to do so, review it.
Related Guides
Related reading: ICHRA and QSEHRA Guide · QSEHRA · ICHRA vs Group Health · Excepted Benefit HRAs · Section 125 Cafeteria Plans
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Laws and rules referenced
IRS Notice 2013-54 — Employer payment plans: how ACA market reforms apply to employer HRAs, health FSAs and arrangements that reimburse individual market premiums; see also 26 U.S.C. § 4980D.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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