Smaller Employers Can Now Offer Pre-Tax Medical Reimbursement Programs
By Ted Ginsburg, Director, Tax & Business Services
On December 13, 2016, President Obama signed the “21st Century Cures Act” which could impact employers who are not subject to the Affordable Care Act (ACA) because they have fewer than 50 full-time equivalent employees. It has both a retroactive and prospective application, and could result in those employers limiting their health program costs. The following information provides a highlight of the changes and considerations for affected employers.
If an employer reimbursed (on a non-tax basis) an employee for that employee’s health insurance premiums or other medical expenses, the employer was subject to a potential $36,500 annual excise tax per employee on that reimbursement. This excise tax, was created under Internal Revenue Code (IRC) Section 4980D because a reimbursement program does not qualify as a “group health plan” for purposes of the ACA. The IRS waived the IRC Section 4980D excise tax until June 30, 2015—employers who continued to reimburse for these expenses were subject to the excise tax on July 1, 2015 (IRS Notice 2015-17). Our advice to clients who wanted employees to acquire their own coverage was to include that reimbursement on the employee’s W-2 as taxable income—so that wasn’t as tax effective as an employer-sponsored health insurance program (which would be income tax free) to the employee.
Section 18001 of the 21st Century Cures Act repeals the excise tax that governed these arrangements for small employers for plan years beginning after December 31, 2016, and provides that the relief from the excise tax that was contained in IRS Notice 2015-17 will apply for all of 2015 and 2016. To be able to offer a tax-free reimbursement of insurance premiums under the Act (this is the “going forward” guidance), the following tests must be satisfied/steps taken:
- The employer is not subject to the ACA because the employer has fewer than 50 full-time equivalent employees
- The program is offered on the same terms to all eligible employees
- A health reimbursement account is created that will reimburse the employee upon showing proof of payment of premiums
- Maximum annual reimbursement of premiums/expenses is $4,950 for single coverage and $10,000 for coverage which includes family members (these numbers will be adjusted for inflation)
- Appropriate plan documents and notices must be provided
How does this benefit small employers?
- Employers who have had difficulty finding affordable group coverage for their small group of employees can now have the employees find their own coverage and be able to provide a tax- free benefit similar to that received by employees of larger organizations. The administration of this benefit will be much simpler than the administration of a small group health plan.
- Employers can now put a fixed cap on the amount of health care costs that they want to provide for their employees; for example, single coverage could be limited to $400 per month, based on a showing of paid expenses, and that level can remain stationary if desired by the employer. This should certainly be considered when the employer’s program is up for renewal.
- Employees of these organizations can now receive a tax-free benefit and find a program that suits their needs; and employees who have spouses/parents with coverage could benefit by submitting expenses to their employers that aren’t covered by the spouse/parent plan.
We would be pleased to discuss issues related to this program, as well as ACA compliance in general. For more information on this topic, please contact Ted Ginsburg, Director, Tax & Business Services.