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Excise Taxes Apply to Employer Reimbursements of Employee Health Insurance Premiums
Practical Law Legal Update 1-569-8045 (Approx. 4 pages)
Excise Taxes Apply to Employer Reimbursements of Employee Health Insurance Premiums
by Practical Law Employee Benefits & Executive Compensation
| Published on 30 May 2014 • USA (National/Federal) |
In a recent Q&A, the Internal Revenue Service (IRS) reaffirmed its position that potentially significant excise taxes apply to employers that reimburse their employees for premiums paid by the employees for health insurance.
In Q&A guidance, the IRS restated its position that an employer that reimburses its employees for health insurance premium costs rather than sponsoring its own health insurance plan:
- Establishes an "employer payment plan" (as described in related IRS Notice 2013-54).
- May be subject to excise taxes of up to $36,500 per year, per employee under Code Section 4980D (26 U.S.C. § 4980D; see Practice Note, Excise Tax Reporting for Group Health Plans (IRS Form 8928)).
Under Notice 2013-54, an employer payment plan is either:
- A group health plan under which an employer reimburses employees for some or all of the premium expenses for an individual health insurance policy.
- An arrangement under which the employer directly pays premiums for an individual health insurance policy covering an employee (see Legal Update, Guidance Addresses the ACA's Impact on EAPs, HRAs and Health FSAs).
An employer payment plan does not include arrangements under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.
Employer payment plans are subject to the ACA's market reforms for group health plans, including:
- The prohibition on annual dollar limits for essential health benefits (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA).
- The requirement to provide certain preventive care without cost sharing (see Practice Note, Preventive Health Services Under the ACA).
However, an employer payment plan will fail to satisfy the annual limit prohibition because the plan:
- Is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement.
- Cannot be integrated with any individual health insurance policy purchased under the agreement.
The employer payment plan also will not satisfy the preventive services rules because it does not provide preventive services without cost-sharing in all cases (and cannot be integrated with individual policies).
As a result, employer payment plans fail to satisfy the ACA's requirements and may subject employers to an excise tax of $100 per day, per employee, under IRC Section 4980D. The IRS emphasizes that these penalties can result in excise taxes of up to $36,500 per year, per employee.
Practical Impact
The IRS' restatement of its policy on employer pre-tax premium reimbursement arrangements is apparently in light of continued efforts by brokers and others to market these arrangements to employers, notwithstanding Notice 2013-54. To drive this point home, the IRS' Q&A expressly references the cumulative, annual excise taxes of $36,500 per employee, which are self-reported to the government.