Realizing Tax Preferences Under the ACA Becomes More Difficult
With 2018 fast approaching, many have begun to focus on the Affordable Care Act's (ACA's) high-cost or "Cadillac Plan" excise tax, which would impose a 40 percent excise tax on employer-paid health care that is valued over certain thresholds. This provision is seen as an effective "cap" or limitation on an employer's and employee's ability to utilize the current income exclusion for employer-paid coverage.
Many employers may be unaware, however, of recent guidance that was issued by the IRS, in conjunction with the Departments of Labor and Health and Human Services (collectively, the Departments), which will limit today an employer's and employee's ability to utilize the current federal income and payroll tax advantages for employer-paid health care. More specifically, pursuant to IRS Notice 2013-54 and DOL Technical Release 2013-03, various long-standing tax-preferred arrangements will no longer be permitted.
This article provides a brief overview of these new rules and their implications to common employer-sponsored arrangements. Employers and attorneys alike should review and carefully understand these new rules to ensure that existing and planned health financing arrangements comply with these new rules.
Background. Pursuant to long-standing federal tax rules, certain employer-paid health care is excludable from an employee's income for federal income and payroll tax purposes. Additionally, such employer-paid health care is also excludable from an employee's income for purposes of determining an employer's share of the payroll tax liability attributable to the wages paid to the employee.
The ACA's market reforms impose a host of restrictions on individual insurance and insured or self-funded employer-sponsored group health plans. Of special relevance to the discussion at hand, one of these market reforms prohibits the imposition of annual or lifetime dollar limits on what are called "essential health benefits" for plan or policy years beginning on or after Jan. 1, 2014 (Dollar Limit Prohibition). Very generally, essential health benefits are defined by reference to state-specific benchmarks and are, by statute, the types of benefits typically covered by an employer-sponsored plan. A second of these market reforms requires that any individual insurance policy or group health plan, whether insured or self-funded, cover certain preventive care benefits without any cost-sharing by the enrollee or participant (Preventive Care Requirement). This second market reform has been in effect for several years now.
Significantly, certain types of group health plans that constitute "excepted benefits" for purposes of the provisions of the Health Insurance Portability and Accountability Act (HIPAA) are not subject to these reforms, such as stand-alone dental and vision plans, certain qualifying health flexible spending arrangements (Health FSAs), Medicare supplemental plans, and insured fixed and hospital indemnity plans, among others.
In addition to these market reforms, the ACA also includes an express statutory prohibition against an employee's use of an employer's Internal Revenue Code (IRC) §125 plan to pay for individual insurance purchased through a public exchange (or the Marketplace in the case of the federally-facilitated exchange). Lastly, the ACA amends the IRC to allow for the provision of certain premium tax credits and cost-sharing reductions to help lower-income individuals afford individual health insurance purchased through a public exchange, such as the federally-facilitated Marketplace (Premium Tax Credits). However, the operative IRC provision, §36B, provides that an individual is not eligible for Premium Tax Credits if he or she has access to affordable, qualifying employer-sponsored health coverage or is enrolled in qualifying coverage regardless of its affordability.
Many questions have arisen regarding how these rules apply to potentially restrict access to, and/or sponsorship of, certain commonly-used employer-sponsored health arrangements, including the following:
• IRC §125 cafeteria plans for use by employees in paying for coverage on a pre-tax basis (Cafeteria Plans);
• Stand-alone health reimbursement arrangements (Stand-Alone HRAs) for active employees;
• Retiree-only stand-alone health reimbursement arrangements (Retiree-Only HRAs);