IRS Kills Defined Contribution

The IRS has issued a two-question Q&A that seems to kill any hope agents had that pre-tax employer contributions or reimbursements for individual health coverage – whether for exchange-based or non-exchange-based plans – would somehow be allowed under the Affordable Care Act.

The recent guidance is really more of a clarification than new news – after all, HPA has been saying for months that the September 13th DOL Technical Release and IRS Notice were pretty clear and that defined contribution on a pre-tax basis for individual coverage is out-of-compliance, but the IRS has now confirmed that the term Employer Payment Plan as used in the previous guidance does in fact include Premium Reimbursement Arrangements.

It seems that all of the funding arrangements that involve an employer contributing tax-free dollars (or using the employer exclusion to allow employees to contribute tax-free dollars through a section 125 plan), including HRAs, PRAs, and EPPs, are in fact employer-sponsored health plans that fail to comply with the annual dollar limit prohibition on essential benefits and the preventive services requirement because these funding arrangements cannot be integrated with coverage purchased in the individual market. And non-compliant plans are subject to big fines under the law.

Here’s what the IRS says in the recent guidance:

What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?

Under IRS Notice 2013-54, such arrangements are described as employer payment plans. An employer payment plan, as the term is used in this notice, 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. As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.

This is certainly not the news that most agents were hoping for, but it is what we expected. And it’s also not a deal-killer. Everything we’ve been saying – in blog posts, coaching calls, industry updates, and white papers – still holds: employers, in many circumstances, would benefit their employees by dropping their group health coverage and permitting their workers to apply for premium tax credits in the individual market. They just can’t contribute tax-free dollars toward that effort.

In the coming weeks, we’ll continue to share more ideas about what employers can do. There are still some options…

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