July 5, 2022

Volume XII, Number 186

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July 05, 2022

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Still Reimbursing Employees For Health Insurance Premiums? You May Be Subject To Significant Penalties!

Until very recently, it was not uncommon for employers to reimburse employees for substantiated premiums paid for individual health insurance coverage.  Many small employers saw this as a viable alternative to group insurance, in large part because employees could exclude the reimbursements from income for tax purposes.

Last year, federal regulators made it clear that these reimbursement arrangements violate the Affordable Care Act.  Reportedly in response to the continued marketing of non-compliant arrangements to employers, the IRS reiterated the point in a Q&A published in May of 2014.  In essence, the law considers these arrangements to be group health plans that do not satisfy the Affordable Care Act’s insurance market reforms.

Noncompliance with these rules is punished severely.  An employer reimbursing its employees for the cost of coverage purchased in the individual market is liable for a federal excise tax of $100 per day, per employee.  That’s $36,500 per employee, per year!  The excise tax liability arises automatically, and an employer liable for the tax is obligated to self-report by filing an excise tax return (Form 8928) with the IRS.

There are legal ways for employers to encourage employees to get individual coverage, either through the exchanges or otherwise, and for employers to help employees pay for the coverage.  For example, the IRS has suggested that an employer could offer employees a choice between a certain amount paid in cash or applied (e.g., by after-tax payroll deduction) to pay individual premiums.  The key here is that the employee will receive the benefit without regard to whether he or she decides to purchase health insurance. 

Action May Be Needed!  Now's the Time for Large Plans To Apply for A Health Plan Identifier 

Large health plans (i.e. with annual receipts of greater than $5 million) must obtain a Health Plan Identifier (HPID) no later than November 5, 2014.  Small health plans have an additional year to comply.  This HPID will be used to identify the plan in HIPAA standard electronic transactions, such as claims, benefit payments and coordination of benefits. 

It is important for plan sponsors to accurately determine how many group health plans they maintain and how many HPIDs to apply for because the HPID will be the primary identification for the plan in many contexts. Unless the employer has a welfare “wrap” plan consolidating multiple benefits under one “plan,” a separate HPID is needed for each health plan maintained by the employer.

In some cases, the third party administrator or, in the case of a fully-insured plan, the insurer, will apply for the HPID on behalf of the plan.  Plan sponsors should check with their vendors to determine who will obtain the HPID on behalf of the plan. 

HPID’s are obtained by submitting an application online through the Health Insurance Oversight System (HIOS) of the Centers for Medicare & Medicaid Services (CMS).  More information is available on the CMS website or by contacting a member of the Poyner Spruill Employee Benefit team.

© 2022 Poyner Spruill LLP. All rights reserved.National Law Review, Volume IV, Number 174
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About this Author

Hugh W. Davis II, Employee Benefits Attorney, Poyner Spruill Law Firm Raleigh, NC
Partner

Hugh practices in the area of Employee Benefits.  He is currently representing corporations and other entities in the design and operation of retirement and welfare benefit plans and executive compensation packages, including matters concerning ERISA and Internal Revenue Code compliance. In his experience, Hugh has represented qualified plan sponsors in restating their plans to comply with the EGTRRA and other changes in tax law, represented sponsors of employee stock ownership plans in connection with plan purchases of employer securities, including leveraged...

919-783-2908
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