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Premiums on a Pre-tax Basis

This article originally ran on November 7, 2014.

By Kevin Lurie, President, Progressive Benefits Group

Editor’s Note: Offering one employee benefit can affect how an employer offers another, and federal regulation of one employee benefit can not only affect another but also can suggest how regulation of another may change. It’s hard to imagine a benefits-related law, and subsequent implementing regulations and guidance, that has had a more significant impact in the last four years than the Patient Protection and Affordable Care Act (referred to in this column as the ACA). 

All that means that, in this case in particular, it is worthwhile to stay abreast of some aspects of the effect of the ACA and to keep certain requirements under it in mind while administering retirement plans and making decisions about retirement plan coverage and offerings. Because any increase in health insurance premiums will have an impact on the dollars available for retirement savings, it is important to understand as much as possible about the changes in health care coverage — and help participants plan for post-retirement health care costs.  

Can an employee pay premiums on a pre-tax basis if the employer does not sponsor a group medical plan? The question is frequent among employers that don’t offer a group medical plan to the employees. Are the employees left paying premiums with after tax dollars (a 20-30% increase in out-of-pocket cost)? The financial difference is drastic and problematic for both the company and the employee. The standard answer is no; you can’t use pretax dollars to pay the premiums unless you have a company sponsored group benefit plan. 

Today, it seems with the Affordable Care Act (ACA) there is always another way to work around the system. With the use of a flexible spending account (FSA) plan both employers and employees can make a pre-tax contribution to pay for the health premiums tax-free (as long as the medical plan is not subsidized). The rules are clear, in no way does not offering a group sponsored medical plan restrict the ability to offer a Code Section 125 cafeteria plan. The fix is utilizing the non-employer-sponsored premium account designed within the FSA plan for employers and employees to contribute tax-free dollars toward individual health insurance. The FSA comes with additional benefits that will help employees pay out-of-pocket expenses tax-free for medical, dental, vision and more. 

Additionally, it has been common, in the public school segment for employers to negotiate fringe benefits for the superintendent of schools where the employer pays the health insurance premiums on behalf of the superintendent. This is no longer permitted, and instead, governing boards are seeking new benefits for superintendents of school, which might include employer contributions to the 403(b) plan, or to a 401(a) defined contribution plan, both of which have $53,000 limits in 2015, as indexed. 

Additionally, there are several important ACA updates that apply to all organizations, including non-profit entities.

Two New Reasons Employees Can Change Their Health Care Coverage 

With the issuance of IRS Notice 2014-55, there are now two reasons an employee covered under a Section 125 plan can change their health care options:

  • An employee can cease participation in their employer-sponsored plan in order to enroll in the health insurance marketplace without an otherwise qualified change in status. 
  • Variable-hour employees (those who may work less than 30 hours a week but were determined to be full-time during a measurement period and are otherwise enrolled in the employer-sponsored plan) can also cease participation in order to enroll in the marketplace when their employment status drops below 30 hours a week.
Your business must adopt an amendment allowing these elections on or before the last day of the plan year in which the elections are allowed. For the 2014 plan year, the amendment must be adopted by Dec. 31, 2015. You must notify participants of these changes. An election to revoke coverage on a retroactive basis cannot be allowed under any circumstance. 

This change does not apply to flexible spending accounts or non-health insurance benefits under a cafeteria plan, such as dental and vision coverage.

Note: the marketplace allows open enrollment at specific times. For 2015, the open enrollment period is Nov. 15, 2014 – Feb. 15, 2015. You may rely on good faith representation from your employees that they will enroll in the Marketplace.

Reinsurance Fee Due in January

Reinsurance fees were established to fund a transitional reinsurance program from 2014 to 2016. The program reimburses carriers with products for high risk individuals offered on the marketplace. 

If you are a sponsor of a self-funded health insurance plan, you must report how many lives you cover to the Department of Health and Human Services for the 2014 plan year by Nov. 15, 2014. This includes employees, spouses and dependents covered under the plan. The IRS has specified four specific counting methods for this purpose: 

  • actual count;
  • snapshot dates;
  • snapshot factor; and 
  • Form 5500

The headcount should be reported on the website Pay.gov. You will then receive a notice regarding the reimbursement fees due, which equal $63 per covered life for 2014. The first installment will be due to the Department of Health and Human Services by Jan. 15, 2015. Fully insured plans will collect these fees through the insurance premiums paid. The fee applies to each medical plan sponsored by the employer and must be submitted on a per-plan basis.

2015 Reporting Requirements

Forms 1094-B, 1095-B, 1094-C and 1095-C for the 2015 plan years will be due to the Internal Revenue Service in 2016. These forms, which all are currently in the draft stage, will be used to report the different types of insurance offered, which employees are covered and various other details related to the employer-sponsored health plans. The IRS will use these to compute both the individual and employer mandates under the ACA. As these reporting forms are detailed and complex, we recommend employers consult with their benefits professional and accounting specialist before completing them. 

Regardless of the not-for-profit status, there are important implications for the ACA that require the sound advice of a benefits professional. 

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