The IRS has proposed new regulations that could let employers avoid Affordable Care Act employer mandate-related penalties by allowing them to reimburse employees for insurance they purchase on health insurance exchanges or the open market.
The regulations are not yet finalized, but the IRS has issued a notice explaining how applicable large employers, instead of purchasing health coverage for their workers, would be able to fund health reimbursement accounts (HRAs) to employees who purchase their own plans.
Under current ACA regulations, employers can be penalized up to $36,500 a year per employee for reimbursing employees for health insurance they purchase on their own.
Employer mandate refresher
Applicable large employers (ALEs) – employers with 50 or more full-time employees or full-time equivalents – must offer health coverage to at least 95% of full-time employees that includes:
- Minimum essential coverage: The plan must cover 10 essential benefits.
- Minimum value: The plan must pay at least 60% of the costs of benefits.
- Affordable coverage: A plan is considered affordable if the employee’s required contribution does not exceed 9.56% (this amount is adjusted annually based on the federal poverty line; 9.86% will be the 2019 affordability percentage).
ALEs that fail to offer coverage are subject to paying a fine (called the responsibility payment) to the IRS.
How the new rule would work
The IRS is developing guidance on how HRAs could be used to satisfy the employer mandate.
In its recent notice, the agency addressed how the regulation will play out, as follows:
Requirement that ALEs offer coverage to 95% of their employees, and dependents if they have them – Under the proposed regs and the notice, an employer could satisfy the 95% test by making all of its full-time employees and dependents eligible for the individual coverage HRA plan.
Affordability – The employer would have to contribute an amount into each individual account so that the remaining out-of-pocket premium cost for each employee does not exceed 9.86% (for 2019, as adjusted) of the employee’s household income.
This could be a logistical nightmare for employers, and the IRS noted that employers would be able to use current affordability-test safe harbors already in place in regulations.
Minimum value requirement – The notice explains that an individual coverage HRA that is affordable will be treated as providing minimum value for employer mandate purposes.
What you should do
At this point, employers should not act on these regulations. The IRS is aiming for the regs to take effect on Jan. 1, 2020.
The final regulations have yet to be written, so they could change before they are promulgated. We will keep you informed of developments.