New Guidance on Employer Payment Plans Regarding Reimbursement of Certain Health Insurance Policies

UPDATED TAX DEVELOPMENT – PLEASE NOTE THAT THIS ARTICLE IS UPDATED AS OF MARCH 1, 2015, WITH NEW INFORMATION REGARDING THE WAIVER OF PENALTIES CONCERNING REIMBURSEMENT OF PREMIUM COSTS

As background information, in September 2013, the IRS issued Notice 2013-54 that provided, among other things, that employer health care premium reimbursement arrangements for employee’s individual health insurance policy premiums created health care plans subject to the Affordable Care Act (often called “ACA” or “ObamaCare”) market reform provisions. It was initially believed that you could get around the potential penalty of $100 per day, per participant and per violation by simply making the employer payment plans (“EPPs”) as taxable income to the employee. However, in November 2014, a set ofFrequently Asked Questions posted on the Department of Labor’s website rebutted that assumption, basically saying that just making the reimbursements with after-tax dollars did not eliminate the potential penalty of $100 per day.

The November interpretation created much anxiety and fear in the church world, as well as in the business world, that churches were going to be subject to thousands of dollars of fines. Such fears were heightened when the IRS announced that employers would have to report and “self-assess” these Affordable Care Act violations by filing IRS Form 8928.

As noted in previous updates on this issue, the conversations with Congress, the U.S. Department of Treasury, the U.S. Department of Labor, and the Internal Revenue Service continued – and escalated – as efforts were made to eliminate this onerous burden created by the Affordable Care Act. While the efforts were not successful in eliminating these provisions, the Internal Revenue Service has recently issued some temporary relief to churches and other employers in regards to these matters.

In what the Internal Revenue Service called “transitional relief” for employers with fewer than 50 people, they issued IRS Notice 2015-17 on February 18, 2014. While this notice is written in a question-and-answer format, the “answers” are not as clear and specific as we would like for them to be. Therefore, some of the issues remain subject to interpretation – and various tax lawyers and accounting firms have taken different positions on some of the issues.

The following are issues that there seems to be a consensus of agreement on:

  • If an employer has only one employee, they can continue reimbursing health care premiums on a pre-tax basis, even past June 30, 2015. It appears that employers in this situation can still reimburse the employee’s premiums and that such reimbursement may continue to be a pre-tax benefit and not includible in W-2 compensation. However, the church should remain alert for changing guidance.
  • By June 30, 2015, an employer must stop paying for or reimbursing individual health insurance unless they have just one employee. After that date, ACA penalties will be incurred if health care reimbursement arrangements are continued.
  • Employers who have more than one employee and do not offer a bona fide group plan, but want to continue to help pay insurance costs for employees, must change the way this is done after June 30, 2015 to avoid penalties. Such can be accomplished by increasing the employee’s salary to cover health care premiums without requiring that the salary increase be used only for that purpose.
  •  Employers do not have to file IRS Form 8928, even if they did have ACA violations in 2014.
  • These clarifications are extremely beneficial to churches, especially the “one employee” exemption and the waiver of the potential penalties for violating the ACA.

There are a couple of other issues raised by Notice 2015-17 that are not so clear:

  • Some tax professionals contend that since Notice 2015-17 waived the penalty for non-compliance, an employer can reimburse health insurance premiums on individually purchased policies pre-tax through June 30, 2015.
  •  Those same tax professionals contend that employers therefore should also consider amending their 2014 payroll reports and W-2s to treat reimbursed health care insurance premiums as non-taxable.

Again, there are differing opinions on the taxability of reimbursed (or directly paid) amounts for employee’s individual health insurance policy premiums since January 1, 2014. If the church did not treat such payments as taxable, or amends the employee’s W-2 to show that they are not taxable, the church treasurer should advise all employees that such treatment is subject to further review and clarification by the IRS and later may be determined to be taxable. Should the IRS determine that such payments are taxable, the employee could be subject to not only the tax liability but also penalties and interest on taxes not paid.

It must be remembered that a group health plan obtained and provided by the employer/church is not subject to the taxability and penalty discussed above.

Please note that in regards to the Affordable Care Act, the Benefits Board presents current information that may change due to new guidance issued by the Internal Revenue Service and further may be subject to unique circumstances or interpretation. It is anticipated that additional guidance by the Internal Revenue Service and an upcoming decision by the U.S. Supreme Court could drastically change the information provided within this article. If so, updates will be forthcoming.

This information does not constitute legal advice. We recommend seeking advice of professional counsel where needed.

About benefitsboard

Art Rhodes is the President and CEO of the Church of God Benefits Board, Inc. - the administrator of the Ministers' Retirement Plan and the Church Loan Fund, Inc. The corporate offices of the Benefits Board are in Cleveland, TN.
This entry was posted in 03 - March 2015, Form W-2, Health Care, Informational Manuals, Internal Revenue Service, Ministers, Pay Roll Taxes, Tax Information. Bookmark the permalink.

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