Five Important Highlights from the Last IRS Notice of 2015
January 21st, 2016
Last month, just before the holidays, the IRS published Notice 2015-87, which outlines several key updates to how employer-sponsored insurance plans are administered. Fortunately, most of the new rules allow for a transition period to give employers adequate time to comply. To save you the time of reading all 31 pages of the Notice, here are five important highlights from the new rules:
- The IRS has reaffirmed that employers don’t have a way to pay for individual medical plans on behalf of employees using tax-advantaged dollars. Doing so violates the market reforms under the ACA. This is true for employer pretax payments/reimbursements and post-tax arrangements. So for the foreseeable future, group insurance will remain the primary way that employers support health coverage for employees.
- Dollars offered through a health reimbursement arrangement (HRA) are disallowed from the medical plan’s affordability calculations if the funds can also be allocated to non-medical plans (such as dental, life and disability). If HRA funds can apply to non-medical plans, federal regulators will consider the employee responsible for paying the entire medical premium. This means the medical plan may be considered unaffordable (costing more than 9.66% of income in 2016, under the ACA rules) for many more employees.
Employers using defined contribution will want to carefully review these new rules, since a misstep may subject employers to excise taxes. To help companies stay up to date, we’ll be reviewing our affordability calculators to line up with the new rules.
- Employers that offer a cash incentive to employees who waive health coverage should note another new rule that affects affordability calculations under the employer mandate. Under certain circumstances, the incentive will be added to the employee cost when figuring affordability. For some employers, the added cost could mean a larger number of employees qualify for tax credits in the public exchange, and therefore, trigger an excise tax for the employer. The good news is that employers won’t be held to this standard until after final regulations are published. However, employers that offer waiver incentives will want to review these new rules soon.
- Employees can apply now for tax credits in the public exchange based on the rule detailed above in No. 3, even though the employer is held harmless from the employer mandate excise tax until final regulations are published.
For example, say an employee earning $40,000 per year pays $100 per month for coverage through his employer. The employer offers a $300 incentive to encourage employees to waive the company’s health coverage. Under the new rules, that employee could argue today that his coverage at work costs $400 (the $100 premium + the $300 waiver incentive). Under the ACA’s rules, the employee’s coverage is unaffordable because when calculated at $400 per month, the cost of coverage is 10% of his income (higher than the 9.66% that the ACA allows). The employee potentially could accept the waiver incentive, plus be eligible for a tax credit in the public exchange.
It’s noteworthy that the IRS is allowing consumers the best advantage in accessing tax credits while holding employers harmless in the short term (based on the temporary relief mentioned in No. 3).
- Employers with HRA plans that are integrated with their medical plan must restrict payments for dependents’ health expenses only to those covered by the medical plan. Reimbursing expenses for employees’ non-enrolled dependents disqualifies an HRA, causing it to violate the ACA market reforms. Existing HRAs have transition relief, if amended, to comply no later than the first day of the 2017 plan year.