IRS Information Letters Provide Further Guidance on “Employer Payment Plans”

The IRS has released a series of information letters providing further guidance on the application of ACA group health plan market reforms to various types of employer health care arrangements. These information letters provide further definition to when the IRS will consider an arrangement to be an impermissible “employer payment plan” that does not satisfy the ACA market reforms. As previously discussed here and here and here, adopting an impermissible employer payment plan exposes employers to excise taxes under Code § 4980D ($100 per day per affected individual).

I. Opt-Out Arrangements. In Letter 2016-0023 the IRS indicated that if an employer pays additional taxable compensation to employees who forgo coverage under the employer’s group health plan (opt-out payments), due to having other coverage, the employer will not trigger the 4980D excise tax, as long as the amount of additional taxable compensation is unrelated to the cost of the employee’s other coverage.

II. Small Plans Exception. In Letter 2016-0005 the IRS allowed reimbursement of individual policy premiums provided that there is only one “active” employee in the plan. This is because the ACA market reform rules do not apply to a group health plan if the plan has less than 2 participants who are active employees.

III. Relief For S Corporations. Letter 2016-0021 explains that S Corporations may continue to pay for or reimburse premiums for their “2% shareholders-employees” without being subject to Code 4980D excise taxes, until further guidance is issued (this position was previously stated in Notice 2015-17).  This relief does not, however, apply to S corporation employees who are not 2% owners.

IV. Beware of Promoters Promising They Can Structure a Plan to Allow Reimbursement of Individual Policy Premiums. In Letter 2016-0019  the Treasury explains that it has been made aware of a number of what it describes as “schemes”, whereby promoters are marketing products that they are claiming will allow employers to reimburse individual health policy premiums without violating the ACA market reforms. Treasury is looking at the information and warns that it disagrees with the promoters’ claims that their product does not impose an annual limit on essential health benefits. Consequently, their product fails to meet the market reforms.

Author: Erwin Kratz

Erwin Kratz practices exclusively in the areas of ERISA and employee benefits law, focusing on tax and regulatory matters relating to qualified and nonqualified deferred compensation and welfare benefits.