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Small employers with health care reimbursement arrangements need to take action after the DOL’s latest Affordable Care Act ruling.

Navigating health reform

New Guidance Clarifies Reimbursement of Employee Health Costs

  • 12/4/2014

A recent Department of Labor (DOL) news release clarifies the restrictions on employer-provided reimbursements of health care costs under the Affordable Care Act (ACA). The release says these reimbursement arrangements, even if reported as taxable payroll to the employee, represent a violation of the ACA market reform rules. This could subject the employer to a penalty as high as $100 per day per employee. The guidance is effective for health plan years beginning on or after January 1, 2014.

As a practical matter, small employers using reimbursement arrangements are most likely to face this risk. Larger employers with 100 or more employees are subject to a mandate to provide group health coverage to employees beginning with their 2015 health plan year. Those with 50 or more employees face this mandate beginning in 2016.

About a year ago, we explained the new ACA market reform provisions and their adverse impact on small businesses with employer-provided medical reimbursement plans and employer reimbursement of employee individual health insurance premiums. That guidance is generally still valid, but the option of maintaining the health reimbursement arrangement as a taxable fringe benefit is now off the table.

Three exemptions

Consistent with our earlier communication, there are three arrangements that remain exempt from these market reform rules:

  • A one-employee health plan
  • An employer-provided group insurance plan, whether furnished alone or accompanied by an integrated medical reimbursement plan
  • Reimbursement plans that cover only ancillary benefits such as dental, vision, or long-term care premiums

Prior to this latest DOL guidance, tax advisors generally understood that including reimbursed premiums and other medical reimbursement arrangements in employee taxable wages would avoid the ACA penalties; this was based on IRS “Q and A” guidance issued in May 2014. Because of this earlier status, there should be a “reasonable cause” defense for any prior payments in 2014, assuming corrective action is taken promptly after receipt of a notification. Reasonable cause applies if the employer corrects the failure during the 30-day period from when the employer knew of the DOL requirements.

Take action if you don’t meet exemptions

Unless you meet one of the exceptions identified above, employers with health reimbursement arrangements should immediately take three actions:

  1. Discontinue any payments or reimbursements of employee individual health insurance policy premiums, and any reimbursements under employer-provided medical reimbursement plans.
  2. Rescind any written plan documents, retroactive to the first day in 2014 when the plan was effective.
  3. Recharacterize any amounts paid to employees for these reimbursements as taxable compensation.

If you are a shareholder in an S corporation or a partner in a partnership, read our companion piece, “Affordable Care Act Guidance for Partners and S Corporation Shareholders,” for additional information that is unique to owners of those entities.