IRS Issues Strong Position on Health Insurance Deferred Compensation & Businesses Terminating Health Plans

Consequences for
Employers Using Employer
Payment Plans

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IRS Bars Employers From
Dumping Workers Into
Exchanges

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A few weeks back the IRS issued guidance on two very important topics that impact employers of all sizes. Hot off the press is our newsletter entitled Consequences of Reimbursing Individual Premiums for Employees. A copy can be found to the right of this blog or by clicking here. I’ve also attached an article from the May 26th edition of the New York Times entitled “IRS Bars Employers From Dumping Worker’s Into Exchanges” (click here).

No matter how many folks you employ, I’d suggest you read both items at this time. These materials are important to businesses of all sizes as owners and managers continue to seek ways to navigate through these transitional times in healthcare due to the Affordable Care Act (ACA) that began, in earnest, January 1st.

Small employers have considered making ‘defined contribution’ reimbursements to employees to use to purchase health insurance, coverage that is often subsidized by the federal government. In some cases those employers did not previously have coverage and, in others, they have been moving to terminate their coverage, thus, creating a ‘qualifying event’ and then sending employees to purchase individual policies (either on or off of an exchange). This approach has been gaining traction in recent months and was only, conceptually, even possible since January with the advent of the laws removal of previous insurer tools such as asking applicants about their health history and pre-existing condition exclusions, as well as the federal tax credits that can subsidize an individual’s premium (and, in fact, did just that in 86% of the applicants during the recent Open Enrollment period for individual coverage). In many cases employers have found that, for at least some of their workforce, (those eligible for subsidies) the highly subsidized individual premiums were less than the rates paid within the group plan they’d sponsored.

A small handful of very large employers have also, since the start of the year, combined new, what I will call experimental, concepts such as medical insurance defined contribution reimbursement payments, often with the creation of private exchanges. For those businesses the IRS’s recent comments will likely impact them too. Defined Contribution, as a concept, has been around in the retirement plan world for decades, but has only recently begun entering the medical insurance world and in light of the recent IRS comments, it seems that there’s more work to be done before the idea can be widely used.

When the law first surfaced a few years ago, when it was first touted, many businesses discussed whether they would continue to sponsor a health plan as a device to recruit and retain employees. Few have actually done that and most studies show that only about 1% of all businesses might actually cease providing coverage (in a tight labor market health insurance is a very important tool to attract and retain good workers). Given the IRS ruling, as well as the White House’s own comments last week, it is clear that the Federal Government does not want businesses to dismantle employer sponsored plans or move employees into the public exchanges. So clear that the newly announced fine for doing so is stiff, $100.00 per day, per employee, or some $36,500.00 per employee per year. The White House continues to tout employer sponsored coverage, so much so that the President said, just last week; “I don’t think that an employer-based system is going to be, or should be, replaced anytime soon”. When employers historically provide coverage, their contributions are not counted as taxable income to workers. But the IRS’s recent rulings make clear that employers cannot meet their obligations under the health law by simply reimbursing employees for some or all of their costs.

Risking a Health
Insurance Strategy the IRS
May Not Approve

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Would You Try This
Health Insurance Strategy
With Your Company?

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As you read through our newsletter, the IRS’s comments and even the Time’s article it becomes obvious that, while the ideas are creative, they are not yet permissible. The IRS Notice clarifies that these arrangements provided to employees cannot be integrated with individual policies, and thus fail to satisfy the ACA’s market reforms. Simply stated, as a result, effective for 2014 plan years, these plans are essentially prohibited.

That’s the ‘bad news’. The good news is that these concepts and others will continue to evolve. We understand that there are already legislative bills being drafted that seek to allow a business to reimburse employees who purchase individual insurance premiums and that, if successful, could become law by 2016. It is our view that in a few years it might not be uncommon to use defined contribution as the mechanism to provide a health insurance reimbursement, payment to employees, at employer groups of all sizes but, alas, as with much else that is healthcare and health insurance these days, there remains more work to be done.

Just two weeks ago the New York Times wrote two additional, powerful, articles on Defined Contribution for small businesses entitled Risking a Health Insurance Strategy the IRS May Not Approve (click here) and Would You Try This Health Insurance Strategy with Your Company (click here). If you are considering such a plan for your business both articles are worth reading, as is considering the lone quote in either from the Department of Treasury which stated; “This type of reimbursement plan generally would fail to comply with the A.C.A.’s prohibition on annual dollar limits.” The IRS promises more guidance at some future point but for now these type plans appear a bit riskier than we suggest, especially so in light of the possible fine per person, per day.

Should you have any questions on our Consequences newsletter, the comments in this blog or need help on anything else please do not hesitate to contact our professional agents and underwriters. We are happy to help and are thankful for the honor to provide your protection, as well as help navigate through the often ‘choppy waters’ that is healthcare reform right now.

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