LEGAL ALERT & ADVISORY

IRS Rules That Small Employer ‘Premium Reimbursement Plans’ Are NOT Legal
Businesses Offering Such Plans Face IRS Penalties Starting July 1, 2015

Over the last year some small employers became interested in creating deferred compensation, or so called Premium Only Health Plans, for their employee’s medical insurance needs where-by employee’s would purchase individual coverage from the Federal Marketplace and the employer would create a plan to contribute a discretionary amount to selected employees to supplement the employee’s cost and purchase of their own coverage. The approach became popular for some given the lack of health questions when applying for individual coverage under the new Affordable Care Act as well as the fact that about 93% of individual premiums are subsidized. Unfortunately the IRS has concluded that these arrangements, known as Defined Contribution Plans, are not legal or permissible. On June 16, 2014 we wrote a blog on: IRS Issues Strong Position on Health Insurance Deferred Compensation & Businesses Terminating Health Plans. As we predicted, the IRS has ruled and while creating a brief grace period for employers that created such plans that ends in June it is important to know that the plans are not permissible.

New Guidance & Relief for Employer Payment of Individual PremiumsThe IRS has released Notice 2015-17 that provides limited penalty relief to small employers (under 50 full time employees) who are using certain premium reimbursement plans that the IRS had previously indicated violate the Affordable Care Act. The new Notice does not change the IRS’ position with respect to Premium Only Plans. However, it does grant a grace period for 2014 and part of 2015 for small employers that use certain types of premium reimbursement arrangements to pay for individual coverage on the exchange, among other things. The relief from filing a form to report themselves and from paying the penalty ends June 30, 2015.

Some fear that purveyors of these plans will likely trumpet this as a sign that the IRS has approved their product however nothing can be further from the truth. In the Notice, the IRS is simply stating that penalties won’t be assessed against small employers (under 50 full time employees) who sponsor them until July 1 of this year.

The Notice also confirms that paying employees more and not tying those payments to health insurance premiums does not violate federal law.

Please contact the professional agents and underwriters here at Morris & Reynolds with any questions you might have on the new IRS Notice or their position on health insurance Premium Only Plans. We are happy to help you in any manner.

DEFINED CONTRIBUTION (TAX FREE) HEALTH INSURANCE

For small businesses that would like to stop purchasing health insurance but still contribute towards employees health coverage as a benefit of their employment the concept of a Section 105 Defined Contribution plan offers many benefits to both your business and your employees. As a result of the Affordable Care Act’s law that, as of January 1st, 2014,requires insurers to offer coverage without health questions and to cover pre-existing conditions, individual and family coverage is more freely available to your employees and the broader availability of coverage, combined with a proper Section 105 Defined Benefit Plan, can help your business and its bottom line as well as our employees and their budgets. In many cases it’s a ‘win–win’ for your business and employees.

Benefits include;

  • Employers can make a set contribution of their choosing towards your employees health insurance that is a tax deductible business expense, just like insurance premiums are in a group policy.
  • The employer’s contributions can be any amount desired and can vary from class to class of employee.
  • Employees are free to select any health insurance company or any policy they like. The employer no longer purchases group insurance and thus each employee can select the insurance company and plan that best meets their own unique needs. Working with the professional agents and underwriters here at Morris & Reynolds your employees, person by person, will select the coverage that is best for them.
  • Employees that qualify for assistance can also receive a premium subsidy from the Federal government based on their income and other factors. In addition to the possible subsidy the employer’s defined contribution can be used to pay some or all of the balance of the employee’s premium.

Defined contribution health plans are an affordable alternative to employer-sponsored group health insurance plans. Defined contribution health plans by themselves are not health insurance plans.

Recruiting and retaining key employees is important to every company and a company’s health benefit program is a key part of the compensation they offer to their employees. Due to the rising costs of traditional employer-sponsored health insurance, defined contribution health plans are gaining popularity in the U.S.

The general concept of a defined contribution health plan is that a company gives each employee a fixed dollar amount (a “defined contribution”) that the employees choose how to spend. Typically, employees are allowed to use their defined contribution to reimburse themselves for individual health insurance costs.

STEP 1 STEP 2 STEP 3 STEP 4
Set any amount to contribute to employee’s health care Give employees health care allowances Reimburse employees on payroll for approved premiums Business liability is controllable & Employees shop for policies that BEST meet their needs

Defined contribution plans allow employees to be more involved in their health care choices. With a defined contribution health plan, employees are responsible for selecting an individual health insurance plan and making payments out of their own finances.

For more information on Defined Contribution Health Plans call us at 305.238.1000.

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