On Friday, September 13, the IRS issued Notice 2013-54 to discuss the application of the “market reform” provisions of the Affordable Care Act (ACA) to certain employer healthcare arrangements, including, among others, arrangements under which employers pay for employees’ individual health insurance policies, either by paying the insurance company directly or by reimbursing the employee. The Notice, which mirrors substantially identical guidance issued by the DOL, also covers health reimbursement accounts under Section 105 and health flexible spending arrangement under Code Section 125. The “market reform” provisions include the requirements to provide certain preventive services with no cost-sharing and to refrain from imposing a lifetime cap on benefits. There are many aspects to this Notice, but this post will focus only on its impact on employers’ subsidies of employees’ individual health insurance policies.
According to the Notice, an employer arrangement that pays for employees’ individual health insurance policy premiums on a pre-tax basis is an employer health plan subject to the ACA market reform requirements, and automatically fails to comply with those requirements because it is deemed to not be integrated with the individual plan for purposes of the annual dollar limit prohibition. However, if the payments are made on an after-tax basis, it is considered a “payroll practice” rather than an employer health plan, and the ACA market reform provisions do not apply.
This notice effectively reverses Revenue Ruling 61-146, a 1961 ruling which addressed a situation where an employer either paid its employees’ health insurance premiums directly to an insurance company or reimbursed its employees’ premium costs under an accountable plan arrangement. The IRS indicated that the employer’s practice of making these payments represented an employer health plan, so that the payments were excludable under Code Section 106. From 1961 until recently, Revenue Ruling 61-146 has been has been a controlling authority. It has occasionally been useful, for example, in supporting the tax-free nature of reimbursements of new employees’ individual health insurance policy premium or COBRA premium payments before they become eligible for employers’ group health plans. Unfortunately, such reimbursements can now only be done on a taxable basis.