Health Insurance Reimbursements

[RDennis]

I have two very small non-profit organizations as clients.

One has two employees. The older employee turned 65 in August and plans (read: hopes) to retire early next year. She was in the group plan (just for the two of them), but when she turned 65 she dropped the group plan and began Medicare coverage and a Medigap policy. She submits reimbursement requests with invoices attach each month.

The second one has three full-time employees and two part-time employees. The ED has his insurance through his wife's policy. The other two do not have health insurance. The ED's idea is beginning next year for this non-profit to give moneys to those two employees to buy health insurance.

On the first situation, I have found references to the Medicare and Medigap policy reimbursements being taxable and not being taxable. One reference indicates that since it is Medicare, that it would be taxable; if not Medicare, then it would not be taxable.

On the second situation, I have not found specific answers. I believe if the employees are given an amount to buy insurance that may or may not cover the total cost, it would be taxable. I believe if the employees submit a reimbursement request for the exact amount, it would not be taxable. The downside of the latter is that one employee is in her late 50s and a smoker, while the other is in her early 40s and very healthy.

Does anyone have any specific references for these situations?

Thank you for any help on this,

R. Dennis Kavanaugh, CPA

[grmy2h]

http://benefitblog.com/2013/americans-take-beating-from-affordable-care-act-aca-and-irs-with-loss-of-tax-free-health-insurance-premiums-through-employers/


By Ric Joyner

Unbeknownst to most Americans struggling to pay for increasing health insurance costs, the Internal Revenue Service, Department of Labor and Health and Human Services, announced a new notice that will aggravate the problem. 09-13-2013 the IRS issued Notice 2013-54 stating employees will no longer receive pre-tax insurance through their employers for health based polices purchased at home.

What does this mean for thousands of Americans? The ability for employees to pre-tax their medical insurance premiums paid at home occurred in this notice. The result is employees who purchase insurance at home will pay more taxes. This tax savings was created in 1961 and saves thousands of dollars in premium cost per year for employees. With the stroke of an IRS pen the savings is no longer allowed. The focus of the ACA health care law seems to be that people are enrolled in group health insurance through their employers. The obvious problem is that this leaves thousands of small businesses scratching their heads on what to do about offering their employees affordable health insurance. Several factors are increasing the cost of medical coverage for small employers due to ACA and normal trend increases. Thus causing choices for small business of whether to offer coverage or stay in business. Exacerbating this problem further is the recent Notice 2013-54. The effect on employees is disturbing.

What impact does this IRS change have on employees? For example, consider a single mother. Not only are her hours being cut due to ACA polices but if the employer’s budget can no longer afford a group policy she must look elsewhere to purchase insurance on her own. Last Friday the IRS, DOL and HHS, presumably along with the Administration, stopped this mother’s ability to acquire a tax free deduction through a Health Reimbursement Arrangements (HRA) or Section 125 Premium Reimbursement Arrangement (PRA) through her employer. The irony is that employees who have group coverage through an employer can pre-tax their portion of the group coverage. But with notice 2013-54 this is taken away from employees who don’t have group coverage in their employer. A big loss of tax savings and affordability for employees!

Let’s look further at the effect on employees. The example here explains how the IRS change impacts the working single mother. The employer notifies her of the loss of group coverage. She shops the market for individual insurance using either a private or government exchange. Assume for this example she purchases a health policy with a high deductible, which can cost $1,000 per month for her family. Prior to the new notice, her employer could pre-tax (tax free) her premium, thus saving her $250 using a Section 125 PRA. With a Section 125 PRA, the mother’s cost would “feel” like $750 per month. In many cases the employer will put money into the fund tax free to help her afford the premium, but with this notice she is now taxed on this money…just because it is for premiums purchased at home or through an exchange. But the employees who have group coverage and pay a portion, CAN still get pre-tax dollars! For a working single mother this is a month’s car payment or rent! Gone in one administrative ruling!

Why is the administration via the ACA focused on employees carrying group medical insurance only versus getting people coverage regardless if it is employer based or individual? Why now when employers of all sizes are already considering their options for the 2014 enrollment season? Small employers across the country are scrambling now as the impact of this Notice filters through the economy to change their strategies. Small employers dropping group coverage, and thus the loss of health insurance for employees are more likely now after this notice than previous. Is this an unintended consequence of the ACA?

Does this federal notice have teeth or is it just proposed? Should the market ignore and move forward hoping the administration will see the “error of their ways”. This ruling may result in many thousands and perhaps millions of people not covered by health insurance. It’s time to stand up; it’s time to call your Congressional Representative.

Since this was an administrative ruling made quickly, it can be changed quickly by people complaining to their Representatives and the press. Contact www.house.gov and www.senate.gov, ask why the IRS has the ability to change deductions without going through Congress.

Further information can be found at www.benefitblog.com

Edited November 9, 2013 by kcjenkins
to make it easier to find if you want to research

[kcjenkins]

http://blog.discoverybenefits.com/post/2013/10/14/Summary-and-FAQs-Impact-on-HRAs-and-Other-Pre-tax-Accounts-IRS-Notice-2013-54-and-DOL-Tech-Rel-2013-03.aspx

[kcjenkins]

Massachusetts Connector Announces Significant Changes to the Commonwealth’s Cafeteria Plan Rules

BY PATRICIA MORAN

On October 29, 2013, the Massachusetts Connector released Bulletin 03-13, which sets forth a significant course change in the Commonwealth’s cafeteria plan, HIRD, and free rider surcharge rules.

History

Under current Massachusetts law, employers with at least 11 employees are required to offer certain eligible employees an opportunity to purchase coverage under one or more “medical care coverage options” on a pre-tax basis through an employer-sponsored “cafeteria plan.”1 For many employers in the Commonwealth, the group of employees eligible for the pre-tax cafeteria plan was broader than the set of employees eligible for the employer’s group health plan.2 But employers could meet the requirements of the law by establishing a cafeteria plan which allowed employees to use pre-tax salary reductions to purchase coverage through the Massachusetts Connector. Employers who did not meet these requirements were required to pay a “free rider” surcharge to the Commonwealth.3 In addition, employers were required to submit certain “Health Insurance Responsibility Disclosure” or “HIRD” reports to the Commonwealth,4 and inform eligible employees of the cafeteria plan opportunity.5

The Affordable Care Act Shifts the Commonwealth’s Position

The Affordable Care Act establishes public exchanges modeled on (but not identical to) the Commonwealth Connector. Unlike the Commonwealth Connector, individuals may not purchase coverage through public exchanges with pre-tax cafeteria plan dollars.6 Accordingly, exchange purchasers cannot reap the benefits of both an exchange subsidy and a pre-tax purchasing option.

Massachusetts has aligned the Connector’s purchasing rules with the Affordable Care Act’s requirements; accordingly, effective January 1, 2014, pre-tax cafeteria plan money can no longer be used to purchase coverage from the Connector. But until now, the Commonwealth has held firm to its cafeteria plan rules, and insisted that subject employers find a way to provide a pre-tax option to all eligible employees under a “medical care coverage option.” Employers thus faced two choices: either offer all cafeteria-plan eligible employees employer-sponsored group coverage, or arrange for their employees to purchase non-group coverage elsewhere, such as through a private exchange. This dilemma was discussed at length in our previous alert accessible at http://www.mintz.com/newsletter/2013/Advisories/3268-0713-NAT-ELB/index.html.

IRS Guidance Causes Further Conflict

On September 13, 2013, the IRS issued Notice 2013-54, which provided that employers cannot offer cafeteria plans to employees to purchase non-group health insurance without an employer contribution. Notice 2013-54 is accessible at http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions. This new guidance created a conflict between the Commonwealth’s cafeteria plan rules and position on the one hand and the Affordable Care Act’s guidance on the other.

Bulletin 03-13: the Connector Changes Course

In Bulletin 03-13, in response to IRS Notice 2013-54, the Connector announced significant changes in its cafeteria plan and related rules. Specifically, the Commonwealth plans to pursue legislation to repeal the state’s cafeteria plan, HIRD, free rider surcharge, and cafeteria plan notification requirements. Pending repeal, the Health Connector plans to pursue a path of “non-enforcement” with respect to the free rider surcharge, and plans to cease development of the HIRD filing and the cafeteria plan notification requirements.

Next Steps for Employers

For plan years beginning in 2013, employers may continue to permit employees to use cafeteria plans to purchase individual plans on a pre-tax basis until the plan year expires in 2014. For plan years starting in 2014, under the federal guidance, employers may no longer offer cafeteria plans that permit their employees to purchase their own non-group health insurance policies using pre-tax income. Cafeteria plans can continue to be offered to employees for other purposes, such as the purchase of group health insurance or other benefits. Employers are advised to review and amend their cafeteria plans accordingly.

[RDennis]

Thanks for the great references. Clearly the rules changed for 2014.