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Proposed Rule Would Allow Employers to Reimburse Staff for Health Premiums

The Trump administration is moving ahead with new regulations that would make it easier for employers to enter into health reimbursement arrangements (HRAs) with their employees, a practice that can be severely penalized under the Affordable Care Act.

Under the proposed regulations – issued by the departments of Labor, Treasury and Health and Human Services – employees would be allowed to shop and pay for their own coverage using tax-free HRAs that are set up by their employers.

Under the proposed rule, employers that offer traditional health insurance would be allowed to fund an HRA with up to $1,800 per year. The money in the HRA could be used to reimburse employees for certain medical expenses, as well as for premiums for health insurance policies or stand-alone dental benefits.

And offering HRAs used to help employees pay for individual health insurance premiums would count as an offer of coverage to satisfy the employer mandate under the ACA.

More options, lower costs

Administration officials said expanding HRAs would give employees more options in terms of health coverage, and it also would reduce costs and administrative burdens on employers.

If enacted, the new regulations would undo Obama administration guidance (as it was not actually written into the regulations) barring employers from paying into HRAs to help workers pay for health insurance premiums from policies they buy on the open market or on government-run exchanges.

Companies that were caught in such arrangements faced a hefty fine of up to $36,000 a year.

The employer mandate would stay intact but the proposed rule would allow an employer to satisfy the mandate by funding HRAs for its workers. Under the employer mandate, organizations with 50 or more full-time or full-time-equivalent employees are required to purchase “affordable” health coverage that covers at a minimum 10 essential benefits as outlined under the law.

HRAs must be affordable

The key is that the HRA must also be affordable under the proposed rules. That would depend in part on the amount the employer contributes to the HRA.

The agencies proposing the new regulations said in an announcement that they would provide further guidance on the HRA-specific affordability test.

Funds going into HRAs would be exempt from federal income and payroll taxes. Additionally, employers would be able to deduct the amount they put into HRAs from their taxes.

The proposed rule would also require employers that offer HRAs to allow a worker to opt out and instead claim a federal premium tax credit to purchase coverage on the individual exchanges.

This is the early part of the rule-making. The proposed regulations will have to go out for public comment before final rules are written and implemented.


Proposed Rules Include New Ways to Satisfy Employer Mandates

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.


IRS Issues 30,000 ACA Penalty Notices

The IRS has been sending penalty notices to more than 30,000 businesses nationwide, advising them that they may be out of compliance with the Affordable Care Act employer mandate. The tax agency said those employers are on the hook for a total of roughly $4.3 billion in fines.

While the individual mandate has been repealed starting in 2019, the employer mandate is intact and the IRS is pursuing penalties aggressively.

Under the ACA, companies with more than 50 full-time employees are required to extend health insurance to their workers. Failure to do so can result in penalties as high as $2,000 per worker.

As the IRS steps up its efforts to pursue companies that fail to comply with the employer mandate, a report in the New York Times indicates that many of the letters that were sent out were for clerical errors that the employer can address in order to avoid the fine.

The Congressional Budget Office predicts the IRS could levy $12 billion in employer mandate violation fines in 2018.

And the IRS is just getting started, as it was delayed in enforcing the employer mandate for the first year it was in effect, 2014, because of delays in reporting and the Treasury Department clarifying the requirements.

That means the first round of penalty notices that are being sent out now are only for the 2015 tax year. Once it’s done sending those out, pundits say that the IRS will quickly start sending out penalty notifications for 2016 and 2017.

The New York Times reported that the IRS is working with some businesses that experienced technical or paperwork issues to help them avoid fines. E. Neil Trautwein, vice president at the National Retail Federation, told the newspaper that some employers are receiving notifications because they checked the wrong box on their 1094-C forms.

Employee benefits attorney John D. Arendshorst told the paper that the government has shown a willingness to reduce penalties when appropriate. He cited one case where a business with some 500 employees had been notified that it faced a $1.9 million fine, which was eventually reduced to $20,000 because the penalty had been caused by a computer error.

If you get a letter

When notifying an employer of a fine, the IRS uses Letter 226-J. The most likely cause of incorrect assessments is errors in Forms 1094-C and 1095-C.

If you receive a letter, consulting firm Towers Watson recommends that you:

  • Respond within 30 days or request an extension. Unless the IRS receives a response within 30 days, the agency will assume that its facts and penalty amount are correct. Employers can request an extension by calling the phone number at the top of the Employer Shared Responsibility Payment (ESRP) Response form. The IRS typically grants these requests.
  • Analyze the letter for accuracy. Review all documents you filed with the IRS and provided to employees to ensure that the information on them is correct and that they match the information in the IRS letter. The review should include the following:
    1. Ensure that all employees listed in the letter as receiving a premium tax credit were common-law employees.
    2. Check whether any employees listed as having received a premium tax credit were enrolled in your health plan.
    3. Check whether you offered health coverage to employees who were not enrolled in the health plan and who received a premium tax credit.
    4. Verify that all employees listed as receiving a premium tax credit were full-time staff.
  • Decide whether to challenge the assessment. If you feel there is a discrepancy between your numbers and those provided by the IRS, you should fill out the ESRP Response form. This filing should include a signed statement explaining the reason(s) for the disagreement and any supporting documentation.

DOL Issues Final Rules for Association Health Plans

The Department of Labor in June issued its final rules for expanding employers’ access to association plans, a move that could result in some increases in premiums for other plans, including Affordable Care Act-compliant small group health plans.

The rule in its essence allows more small businesses and self-employed workers to band together to buy insurance. The final rule is part of the Trump administration’s plan to encourage competition in the health insurance markets and lower the cost of coverage.

It does that by broadening the definition of an employer under the Employee Retirement Income Security Act (ERISA) to allow more groups to form association health plans and bypass ACA rules, like requiring plans to offer the 10 essential benefits. But what’s not clear is how the marketplace will react and what kind of plans will ultimately be created to target this new potential market.

In announcing the final rules, Labor Secretary Alexander Acosta said that some 4 million people would likely gain coverage in the association plan market, most of them migrating from the small group and individual markets. The figure also includes an estimate that 400,000 people who currently don’t have coverage will end up securing coverage in association plans.

An insurance-industry-funded analysis of the final rule by Avalere Health, a health care consulting firm, has predicted that mostly healthy, young people are expected to gravitate to association plans, which would spark rising premiums in the ACA individual and small group markets. Avalere projected premiums would increase by as much as 4% between 2018 and 2022.

Under prior rules, association health plans had to comply with ERISA’s large-employer insurance requirements. Many existing association plans have been required to comply with small group and individual insurance market regulations, including protections for people with pre-existing medical conditions and covering the ACA’s 10 essential health benefits.

The specifics of the final rule

Here’s what you need to know about the final rule:

  • Association health plans cannot restrict membership based on health status or charge sicker individuals higher premiums.
  • Plans may be formed by employers in the same trade, industry, line of business, or profession. They may also be formed based on a geographic test, such as a common state, city, county or same metropolitan area (even if the metropolitan area includes more than one state).
  • The primary purpose of the association may be to offer health coverage to its members. But, it also must have at least one substantial business purpose unrelated to providing health coverage or other employee benefits.
    A “substantial business purpose” is considered to exist if the group would be a viable entity in the absence of sponsoring an employee benefit plan.
  • The association plan must limit enrollment to current employees (and their beneficiaries, such as spouses and children), or former employees of a current employer member who became eligible for coverage when they worked for the employer.
  • The final rule reduces the requirement for working owners. To be eligible to participate they must work an average of 20 hours per week or 80 hours per month (the proposed rule required an average of 30 hours per week or 120 hours per month).

An association plan may not experience-rate each employer member based on the health status of its employees; however, it may charge different premiums as long as they are not based on health factors.
For example, employees of participating employers may be charged different premiums based on their industry subsector or occupation (e.g., cashier, stockers, and sales associates) or full-time vs. part-time status.


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