Thought I understood - now -- different opinion // $100 day per employee penalty / ACA

[easytax]

Thought I finally understood and do not use the reimbursement plans for employees (even sole prop.) because of the ACA $100 a day per penalty. This applies to sub S, etc., anything that basically does the reimbursement route, versus having a 'proper" (ACA approved plan).

Now an article from a knowledgeable source states otherwise (as I read I, anyway). Any help in seeing if I am reading/understanding it incorrectly would be appreciated. It is a bit lengthy but I figured, better here than asking you to go to a link.

I basically agree about the "wrap-around" approach if you have an ACA approved policy in place, etc.  BUT  the employee reimbursement part -- STILL has me wondering/worrying.

----------------------------- excerpt follows ---- ad and identity parts removed --------------

LIES, DAMNED LIES, AND STATISTICS.

 

A marketing example was mentioned of a client using a medical expense reimbursement plan to write off the cost of her daughter’s braces as a business expense (rather than a regular itemized deduction subject to the 10% floor on medical expenses). It was then asked something to the effect of this: “Doesn’t the Affordable Care Act make medical expense reimbursement plans illegal and impose a $100/day fine on employers who use them?”

 

First, a little background. A Section 105 medical expense reimbursement plan, or MERP, is a long-established benefit plan dating back to 1954. The MERP lets an employer reimburse employees for any eligible medical expense they incur on behalf of themselves, their spouses, and their dependents. Typically, companies that adopt a MERP will buy group health insurance for their employees, then establish a “wraparound” MERP for expenses the underlying insurance doesn’t cover. Alternatively, some employers will “self-insure” and dispense with group insurance entirely, paying costs directly out of pocket and saving the cost of an insurance company’s profit and an agent’s commission.

 

A MERP can cover anything that would be deductible as “medical or dental” under Code Section 213. It can also cover any type of health insurance – individual policies, Medicare and “medigap” premiums, and even long-term care coverage. This is all well-established, black-letter law.

 

Over the past few years, group health insurance has gotten more and more expensive. In fact, it has gotten so much more expensive than individual policies (because insurers can underwrite individual coverage) that some employers are the saying the heck with group coverage, dissolving their plans, and buying their employees individual plans. I can’t tell you how many clients have asked, “My client wants to get rid of his group policy; can he set up a MERP and use it to reimburse employees for their individual policies?” And the answer, until recently, has been “have at it!” I’ve seen this sort of substitution cut plan costs in half or more. It really is amazing.

 

But now there’s a new rule that has upended that perfectly valid (and effective) strategy – courtesy of our newest BFF, the ACA. The ACA says, among other things, that health plans can no longer impose annual limits on benefits. This is part of what the law calls “market reform” provisions, and for most providers, it’s no big deal. Insurance companies have eliminated their caps on benefits, priced it accordingly, and called it a day.

 

Everything was fine until September 13, 2013, when the IRS issued Notice 2013-54. This is the most confusingly written piece of government “guidance” I’ve encountered in my entire career. And it takes direct aim that the individual premium reimbursement strategy I just outlined. The Notice says that if a MERP “wraps around” a complying group health insurance policy, it will be considered “integrated” into that compliant plan for purposes of meeting the market reform requirements. However, if an employer uses a MERP to reimburse an employee for the cost of individual coverage, that MERP will not be considered to meet the market reform requirements. 

 

Now, this makes no logical sense at all. The IRS says that a using a MERP to reimburse the cost of individual coverage is treated as imposing an impermissible limit on benefits (specifically, the cost of the reimbursement). This is true even though the underlying individual health insurance policy being reimbursed has no annual limit on benefits! But even though the ACA itself runs over 2,400 pages, apparently there’s no room for common sense in the IRS interpretation.

 

Here’s where the worst of the misinformation comes in.

 

An employer who offers a plan that doesn’t meet the market reform act provisions is subject to an excise tax of “up to $100 per employee, per day.”

 

Somehow, the insurance industry, along with their willing accomplices in the financial press, have turned that tax into THE WORST THING THAT COULD EVER HAPPEN TO YOUR CLIENT. OH MY GOD, THE SKY IS FALLING AND IF YOU EVEN THINK OF SETTING UP A MERP, THE IRS WILL HOUND YOUR CLIENT INTO BANKRUPTCY AND THEY’LL SUE YOU TO WITHIN AN INCH OF YOUR LIFE!!!!! FORGET ABOUT THE EARTH GETTING HIT BY AN ASTEROID – YOU COULD BE LIABLE FOR $100 PER DAY PER EMPLOYEE!!!!!

 

I can’t tell you how many articles came out last summer, when the deadline for the new rules kicked into effect, warning everyone on the planet about that $100 per day disaster. But that warning has morphed into a rumor that MERPs in general are now “illegal,” and group health insurance agents (who get paid more to sell group policies than individual policies) have been only too happy to tell clients that if they adopt a plan, they’re just begging the IRS to fine them out of existence.

 

Here’s what the agents and press don’t tell you:

• The market reform provisions don’t apply to a single-employee plan. Are you taxed as a sole proprietor, with no employees? Want to set up a MERP, hire your spouse, and reimburse them for the cost of your family’s healthcare costs. Go for it – the ACA doesn’t change a single thing about it.

• It’s also still perfectly legal to offer a MERP that wraps around a group health insurance policy. Nothing about those wraparound plans has changed. 

• It’s even perfectly legal to offer a premium reimbursement plan to pay for individual health insurance. (Except for subsidized policies from an exchange. No double dipping!) Those “premium reimbursement plans” aren’t “illegal” at all. They’re just subject to a penalty tax.

• If the IRS ever does come in and tell you your plan doesn’t comply, you have 30 days to correct the flaw before becoming subject to the tax. No harm, no foul.

• Now, let’s say you thumb your nose at the IRS and continue offering your noncompliant plan. You’re not ready to join a militia and take over federal property, are you? But you’re going to take a stand against Big Brother and tell the government “no.”

That $100 per day tax, that multiplies into a terrifying $36,500 per year, per employee? It’s capped, at just 10% of the cost of noncompliant benefits an employer provides. Pay $8,000 per year for your employee’s coverage? It’s capped at just $800. In fact, for larger employers, it’s even further capped at $500,000.

 

No employer will ever get caught owing a $36,500/employee tax. In fact, it may still make perfectly good financial sense for an employer to get rid of their group coverage, buy noncompliant individual policies, pay the damn 10% tax, and still come out ahead!

 

Now, I haven’t seen a single article in the popular financial press that mentions those limits. But I’ve seen plenty of scaremongering! And that scaremongering is what leads to questions.

 

But please, for the love of God, if you hear that using a medical expense reimbursement plan (or any other strategy) is “illegal,” do your homework! Don’t let your clients take tax advice from sensationalist reporters or untrained health insurance agents looking to fatten their overrides and bonuses. Don’t let them be intimidated out of perfectly legal strategies that might save them a ton of money! 

[Richcpaman]

Easy:

Why did you remove the source?  Why can't we fact check this?

I actually agree with this guys interpretation. 

Rich

 

 

[easytax]

22 minutes ago, Richcpaman said:

Easy:

Why did you remove the source?  Why can't we fact check this?

I actually agree with this guys interpretation. 

Rich

 

 

This was from an advert wanting me to join their "tax" organization. Just wanted to know about the facts stated as they do make sense BUT have been (from other sources) given to be "understood" incorrectly. i.e. the $100 day penalty should an organization reimburse the employee for medical coverage, etc..

The "previous" IRS allowance of the circumstances since the ACA (being written by, interpreted by multiple agencies) makes PAST PRACTICES open to a different understanding today.       An example might be --- here in PA, many construction firms going along nicely with   -- independent contractors -- as interpreted by IRS standards /// BUT /// with the DOL (department of labor) independent contractor standards the "OLD" way of doing things is/can cost a lot of money ---- because the "standards" are quite different and the IRS is starting to go toward using the DOL standards.

Even without the source (writer), the facts are either correct or not ---- whoever wrote this has no bearing, as I see it. I just want to know correct or not.

I do not do enough business returns today (going toward just 1040's due to some medical limitations - do not need the fuss, etc.) to know and just do not want to guide anyone incorrectly, should they ask. Hence my inquiry here. I trust this board (also the person who sent the advert) and the board neither gains or loses something with their review.

 

 

 

[jasdlm]

Easytax, I got that same email.  After reading it, I read the following and decided to advise clients against reimbursing through a section 105 plan.

https://www.irs.gov/pub/irs-drop/n-15-17.pdf

I would certainly be eager to hear others' thoughts on this issue.

[jasdlm]

One more thing:  Please see Q3 in the following excerpt from the DOL website.

http://www.dol.gov/ebsa/faqs/faq-aca22.html

I don't like this answer, and I would be happy to be wrong.  Eager to hear what others say.

 

[BulldogTom]

I think you guys are reading too much into the law.  What the author above is saying is that you can have a 105 MERP that is in conjunction with a Minimum Essential Coverage Health plan.  The key is that you have the MECHP in place.  If you do that, you can wrap the MERP around it and still be in compliance with the ACA.  This is what I have understood and I think that is all the author is saying.

just my 2 cents

Tom
Newark, CA