Congressional Movement on Premium Reimbursement Plans

By Tom Younger, J. Smith Lanier

Many small businesses have in the past reimbursed employees for all or a portion of individual health insurance premiums. Long ago IRS determined that such arrangements are in fact employer-sponsored health plans, to be treated no differently for tax purposes than group plans[1]. As such, the reimbursed premiums were deductible to the employer and not taxed to the employee; on the condition that either (i) the employer paid the premium directly to each insurance carrier or (ii) the employee provided proof of payment to the employer before reimbursement was made.

Now, fast forward 50 years. Everything was lovely until the passage of PPACA. As we have been reporting for the past couple of years, premium reimbursement plans have run afoul of one of the basic market reform provisions of PPACA, which prohibits any lifetime or annual benefit limits in health plans[2]. IRS determined in 2013 that premium reimbursement plans have a limited benefit (that of reimbursing premiums), and employers could not claim title to the compliant PPACA provisions of the individual policies, since they did not own or provide those contracts.[3] This ruling was originally effective Jan. 1. However, early this year IRS offered relief by not imposing penalties until July 1 [4]. We are now of course in that penalty phase. The exaction is the overall draconian PPACA violation penalty of $100 per day per employee ($36,500 per employee per year)[5]. A small business with 30 employees with a premium reimbursement arrangement who has not gotten the word could accrue total penalties of $552,000 by the end of this year. It is thus not inconsequential to be out of compliance with PPACA – on any front, actually.

Legislation has been introduced in Congress that would allow small businesses to continue premium reimbursement plans and be exempt from this PPACA restriction[6]. Sen. Tom Harkin (D-IA) introduced S. 1697 in the Senate, and Rep. Charles Boustary (R-LA) introduced a companion bill (H.R. 2911) in the House. Thus there appears to be at least some bi-partisan support for this important small business relief initiative. Exactly when the respective bills would clear committee and come up for vote, and whether the president would sign such legislation is unknown at this point.

[1] Rev. Rul. 61-146

[2] PHSA §2711

[3] IRS Notice 2013-54

[4] IRS Notice 2015-17

[5] IRS §4980D

[6] Would apply only to employers with less than 50 full-time employees and full-time equivalents

Not everyone is an expert on health care reform. But the folks at J. Smith Lanier, one of our endorsed services providers, are.  For this reason they created a publication called the Health Care Reform Alert. J. Smith Lanier has been providing these to its clients since 2010 when the bill was passed and now offers it to the members of ABA. It is J. Smith Lanier’s intention in the alerts to take the many pages generated by the Centers for Medicare and Medicaid Services, U.S. Department of Labor or Treasury and filter them down into terms that all can understand. For more information on how J. Smith Lanier can help your bank, contact Tom Younger at (256) 890-9027.