ATLANTA — Credit unions considering sending employees to a health insurance exchange and reimbursing them with tax-free contributions are likely rethinking those plans.
The Internal Revenue Service recently clarified that such arrangements do not meet the requirements of the Affordable Care Act and may be subject to a tax penalty of $100 a day — or $36,500 a year& mdash; for each employee who goes into the individual marketplace.
"Sending staff to an exchange and then helping them with the premiums on a pre-tax basis is likely attractive for a number of small credit unions," said Annette Bechtold, recognizing the move also removes the burden of managing employee healthcare plans. "This was becoming a more attractive option — now it isn't."
Bechtold, SVP of regulatory affairs and reform initiatives for Digital Insurance, a health benefits advisory firm, explained that typically when employers reimburse an employee health expense, including a premium, it is done via a health reimbursement arrangement (HRA). When employers provide this coverage, their contributions are not counted as taxable income to workers.
"These employer payment plans are considered to be group health plans, the IRS recently clarified," said Bechtold. "But as a group health plan, they do not satisfy requirements of the Affordable Care Act."
Under the ACA, insurers may not impose annual limits on the dollar amount of benefits for any individual, and they must provide certain preventive services, like mammograms and colon cancer screenings, without co-payments or other charges, Bechtold noted.
Employers with fewer than 50 full-time staff are not required to provide a healthcare plan under the ACA. However, above that total employers must provide coverage to full-time workers or face a fine.
Yet some companies have stated it would be cheaper to pay the fine and send staff to an exchange, reimbursing a percentage of the costs.
Tommy Cobb, CEO of the $64 million Tuscaloosa CU in Tuscaloosa, Ala., previously told Credit Union Journal that due to rising insurance premiums the institution was considering sending employees to a health insurance and helping staff with costs.
Cobb said he was surprised when he learned of the recent IRS announcement, which may have taken an option for his CU off the table.
"Our renewal for health insurance is June, so I am waiting on information now," said Cobb. "All I know now is that our plan will be re-categorized to fit new rules. I don't know the prices now. I am looking into the old cafeteria plan where we give staff allocation and they can choose how to spend it or receive it as pay."
A key benefit of employer-sponsored health insurance plans is the ability to make contributions on a pre-tax basis. Employers still considering dropping their plan and sending staff to an exchange could reimburse the costs via higher pay and not run afoul of the IRS rule.
But in such cases, the employer and employee would owe payroll taxes on those wages, according to Bechtold. "So what does this really accomplish?"
She added that the recent IRS announcement, which came in the form of a Q&A, is not new information. "This is just a recap of IRS Notice 2013-54 that came out last September."
Bechtold noted that even before this recent IRS news that not many credit unions were considering sending staff to exchanges. Nonetheless, she fears this IRS rule hurts small shops most.
Some small credit unions that did not offer healthcare, in an effort to compete, retain and attract talent, were likely considering some kind of plan for staff. "Now they have one less option," she added.
The IRS noted that employers can use an HRA to reimburse for retiree costs for a health insurance exchange without facing penalties.
