The issue that I see, after taking a break from the business, (still am) is that people, and some companies ramped up to sell individual policies to employees, through employers, using HRAs and section 125 Cafeteria aka Flexible Spending plans. Why? Because of O-Care’s very nice provision; “no underwriting and everyone is covered, but you will pay a gazillion dollars for your premiums”. That ramp up to sell through HRAs and section 125 made sense.
The following is how the tool could be wielded: Use section 125 or an HRA to purchase individual policies, pre-tax the policies and let the employees purchase their own health insurance. Employers then could set up funding, for example, annually or monthly “to help” employees afford their choice in coverage. Perfect solution to this overarching problem of funding and being forced to provide health insurance to employees and keep costs in line.
However, the Administration (using the IRS), first stopped HRAs from reimbursing individual insurance policies (you could bury the policy inside the HRA thus becoming pre-tax), but left out section 125, or did they? When the IRS does something like this, in the past, it was assumed by the industry they meant the repercussions to be “analogous” to other pre-tax plans because HRAs actually sprang from Section 105 plans, which are part of the tax code choices to build a menu of pre-tax benefits for employees in section 125. An example of a cafeteria style menu item is a section 129 daycare benefit FSA (Flexible Spending Account).
But some companies and individuals decided they need not abide by these rules and are vocal about it. I railed for several years that common sense should prevail when the “bear” is sleeping not to poke a stick in its eye. The bear woke up and gave us back the poke in the eye with Notice 2013-54 which provided a clear death to individual polices in section 125, and also killed a new emerging market which was a great solution for employers. No defined contribution in 125 either! What is “defined contribution”, you dare ask? Giving employees a set or flexible dollar amount and letting them purchase their own coverage. The, “I will do what I want to do because my business is based on it” crowd, decided to poke the bear in the other eye! The IRS doesn’t like that. Thus, another round of market-killer regs.
The exasperation for me is the; “in your face” challenging style of some of these groups. In my 28 years in this field, this is the first and worst time in IRS pre-tax regs history that I have encountered a behavior of this sort and I am not alone. This is the worst time for them to poke the bear because this administration doesn’t follow normal constitutional processes for getting laws changed or amended because they use executive fiat versus going through normal law making processes.
To all these companies who wish to keep poking the 700 lb. IRS bear and hope to live… “it ain’t happenin”. The entire industry could be wiped out with a pen stroke. Besides, big bears have really bad breath.
On to the article:
|ConsumerDriven Market Report ALERT 02/20/2015 (used with permission and pls get a subscription for these alerts) New survey may show long wait for small firm shopping IRS Tells Small Firms: Wait For SHOP Exchanges|
|Small firms wanting to offer “defined contribution” by letting employees shop for individual health insurance plans then paying the premium will have to wait until the new ACA SHOP Exchanges get going, the Treasury/IRS just announced. U.S. companies now doing this have to buy group health coverage for workers before June 30 to avoid a tax hit.This in effect is telling small U.S. employers to drop dead. An upcoming CDMR survey of 77,000 employers is expected to show a huge uphill climb for SHOP exchanges: large majorities of U.S. small firms have no idea that SHOP exchanges even exist, experts say. Premium reimbursement or what IRS calls “employer payment plans” started to take off after 2010 as small firms began thinking they would get hit by cost-shifting. But then IRS/Treasury shocked the market by declaring “defined contribution HRAs” illegal (i.e. if they pay the premium versus expenses, so the worker gets a tax-exempt premium). Normal HRAs were declared legal, but not “standalone HRAs” that have not linked to group coverage. “The SHOP Marketplace addresses many of the concerns of small employers,” the new IRS announcement says euphemistically. “However, because the market is still transitioning and the transition by eligible employers to SHOP Marketplace coverage or other alternatives will take time to implement” the tax is delayed for a few months. Apparently, the assumption is that SHOP Exchanges will be around early next year to offer relief…|
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