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IRS Notice 2015-87

The Patient Protection and Affordable Care Act (ACA) requires, among other things, that employers provide “affordable” major medical coverage to their full time employees.  If “affordable” coverage is not available to an employee and that employee purchases subsidized coverage on the public marketplace, the employer must pay a penalty tax for that employee.   In general, coverage is “affordable” if the cost to the employee to purchase the lowest cost “employee-only” coverage is not more than 9.5% of his or her compensation.

On December 16, 2015 the IRS issued guidance to help affected employers (i.e., those with  50 or more “full time equivalent” employees) calculate an employee’s cost of coverage.  The IRS notice gives guidance in two common situations:

 Situation #1:        

 An employer offers two or more major medical policies.  If an employee chooses a major medical policy with a lower premium, the employee receives a “reward”.

 Situation #2:

The employee receives a “reward” if the employee waives coverage under the employer’s major medical plan(s).

Can an Employer require that this “reward” be deposited into the employee’s 403(b) account?

No.  This has never been permitted by the tax code.

 Is there any way that this can be done?

Yes, but it must be part of the employer’s Section 125 (cafeteria) plan.  If permitted by the plan document, the “reward” can be “cashed out” by the employee as additional taxable compensation.  The employee can then contribute this additional taxable compensation to his or her 403(b) account.  Deposits of this “reward” into a 403(b) plan cannot be made mandatory by the employer.

How does this impact “affordability”?

The amount of “reward” does not reduce the employee’s cost of coverage for ACA purposes.

What is the impact on IPERS contributions?

The amount that the employee cashed out (or could have cashed out) is included in compensation for IPERS purposes.  There is a limited exception for “dual covered” employees.

What “rewards” can be offered instead of cash (or in addition to cash)?

Benefits commonly offered include:

  • Group Dental Coverage
  • Group Vision Coverage
  • Group Term Life Insurance
  • Health Flexible Spending Account (Health FSA)
  • Deposits to a Health Savings Account (if the employee meets the HSA eligibility requirements)
  • Dependent Care

What is the impact on IPERS contributions?

The amount that the employee cashed out (or could have cashed out) is included in compensation for IPERS purposes.  If there is no cash out option, there is no impact on IPERS covered wages.

How does this impact “affordability”?

The employee’s cost of coverage is not reduced by any amounts that the employee could have used for any of the above benefits .  Even if there is no cash out option, if the “reward” can be used to purchase any of the above benefits, then “reward” amounts do not reduce the employee’s cost of coverage.

How does this impact Health FSA annual benefit elections?

If the employee can elect to take the “reward” as additional taxable cash compensation, then the maximum Health FSA annual benefit for that employee is $2,550 (as indexed).

If the employee CANNOT elect to take the “reward” as additional taxable cash compensation then the amount of “reward” that can be used to purchase Health FSA benefits is limited to the greater of:

1)      $500, or

2)      100% of the employee contribution (the employee contribution is limited to $2,550 as indexed)

For example, if the employee makes no Health FSA contribution, the amount of “reward” that can be elected as Health FSA benefits is $500.  If the employee makes a $2,550 Health FSA contribution, the amount of “reward” that can be elected as Health FSA benefits is $2,550 for an total annual Health FSA election amount of $5,100.

How can the amount the employer offers as “rewards” be used to satisfy “affordability”?

The benefits that can be purchased by the “rewards” must be limited to benefits that will be used exclusively to pay for medical care.

Benefits that can be purchased by “rewards” include:

  • Group Major Medical Coverage
  • Group Dental Coverage
  • Group Vision Coverage
  • Health Flexible Spending Account (Health FSA)

If only these benefits are available, the “rewards” amount will reduce the employee’s required contribution to satisfy “affordability”.

What about Health Savings Accounts?

Although HSAs are not mentioned in the guidance, we believe that HSA deposits do not meet the standard because HSAs are not limited to the payment of medical care expenses.

Beginning in 2017, IPERS requires employers to annually certify that their Section 125 plans are in compliance.  We would be happy to work with you to review compliance and suggest changes if you are out of compliance.

These rules are complex and it is highly recommended that employers seek expert advice in determining how their specific plans are impacted by IRS Notice 2015-87 and what plan designs can be implemented to mitigate this impact.

This review is intended primarily to be a brief discussion of the impact of IRS Notice 2015-87.   It is not intended to be legal, accounting, tax return preparation or other professional advice.  Advantage Administrators assumes no liability whatsoever in connection with the use of these comments, nor are these comments directed to specific situations.  Employers and brokers are encouraged to discuss strategies for compliance with the Affordable Care Act with their own legal counsel and other advisors.