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From his column God, Government and Me—Money in the Churchgod-government-me-03-15-1

Church Medical Reimbursement Update

By now, most smaller churches across America are aware they are exempt from the employer mandate of the Affordable Care Act (ACA), because they have fewer than 50 full-time equivalent employees (FTEs).[1] That’s the good news.

The bad news: without even knowing it, many of these same churches may have subjected themselves to penalties of up to $100 per employee, per day for making voluntary healthcare payments on behalf of employees (i.e., for individual policy premiums or for other out-of-pocket medical costs) that do not comply with ACA market reforms. These onerous penalties became effective for health plan years beginning on or after January 1, 2014, so care must be taken now to eliminate this practice and follow the existing guidance.

Background

For decades, it has been a common practice of many smaller churches that are unable to offer group health insurance coverage to assist employees with the cost of their individual health insurance coverage and/or other out-of-pocket medical expenses. Churches would pay these costs directly on behalf of employees or provide them with reimbursements after incurring expenses. If certain formalities were followed, these arrangements were generally blessed by the IRS and even allowed on a tax-free basis for employees.

That all changed following issuance of certain guidance relating to ACA market reforms. When the ACA guidance was initially issued related to reimbursements in September 2013, it was clear that tax-free reimbursement of individual healthcare insurance premiums would trigger an excise tax of $100 per employee, per day. However, many interpreted that guidance as permitting an employer to avoid ACA excise tax problems if they reimbursed the individual healthcare insurance premiums on a post-tax basis.

In November 2014, the government issued additional guidance, clarifying (changing its position) that an employer is not permitted to reimburse individual healthcare insurance premiums on either a pre- or post-tax basis. That means churches who adjusted their practices to align with the initial guidance by paying after-tax reimbursements may have incurred excise tax liability and should discontinue these payments or reimbursements on either a pre- or post-tax basis.

Temporary Reprieve

In late February 2015, the IRS granted a temporary moratorium on these penalties. It is now critical for smaller churches to come into compliance by June 30, 2015. Those that fail to comply after that date will be subject to excise tax retroactive to January 1, 2014.

Churches that may be affected by these penalties should consult with their professional advisors immediately for guidance on any potential liability for past noncompliant reimbursements and to properly structure future healthcare plans and payments.

Exceptions

For churches without a group healthcare plan, there are still a few exceptions to the general rules discussed above. The following types of employer healthcare payments/reimbursements on behalf of employees remain exempt from the ACA market reforms:

  • One-participant[2] health plans
  • Accident-only coverage
  • Disability income
  • Certain limited-scope dental and vision benefits
  • Certain long-term care benefits
  • Benefits under an employee assistance program, if the program does not provide significant benefits in the nature of medical care treatment and satisfies certain additional requirements

The charts below may be helpful to churches. I highly recommend seeking the advice of professional counsel to assist in your decision-making and to help guard against possible liability exposure for noncompliance.


UPDATE: In February 2015, the IRS issued Notice 2015-17 providing limited transition relief to certain smaller employers from the ACA market reform excise tax penalties until June 30, 2015. The transition relief only applies to organizations with fewer than 50 full-time equivalent employees. While payments or reimbursements for the cost of employees’ individual health insurance policy premiums are entitled to relief, other forms of noncompliant healthcare payments or reimbursements (e.g., out-of-pocket medical expense reimbursements under a stand-alone health reimbursement arrangement (HRA)) will still be subject to excise tax penalties.

Description of Payment/Reimbursement Arrangement: Penalties waived until 6/30/15?

Employer with 50 or more FTEs

 

No

Employer with fewer than 50 FTEs that paid/reimbursed the cost of individual health insurance policy premiums for employees

 

Yes

Employer with fewer than 50 FTEs that paid/reimbursed health care expenses other than individual health insurance policy premiums

 

No

UPDATE: Churches that qualify for the transition relief rules in IRS Notice 2015-17 need not file Form 8928 to self-report violations for noncompliant payments or reimbursements made in 2014 or for the first half of 2015 (through June 30, 2015).

Description of Payment/Reimbursement Arrangement: Form 8928 waived until 6/30/15?

Employer with 50 or more FTEs

No

Employer with fewer than 50 FTEs that paid/reimbursed the cost of individual health insurance policy premiums for employees

Yes

Employer with fewer than 50 FTEs that paid/reimbursed health care expenses other than individual health insurance policy premiums

No


Dan Busby is a certified public accountant (CPA) and president of the Evangelical Council for Financial Accountability (ECFA)—an accreditation organization that sets standards for governance, financial management, and fundraising/stewardship for churches and other nonprofits across the country.

Please note: Dan Busby and Pensions and Benefits USA are not permitted to offer legal or tax “advice.” Important tax questions should be discussed with a qualified tax advisor to be sure all tax liability is met.

 


[1] Or less than 100 FTEs through 2015.         

[2] The exact language from the IRS guidance is a “group health plan that has fewer than two participants.” The IRS has informally indicated that an employer could not set up a separate health plan for each of its employees and fall within the exception. In addition, an employer with more than one employee that limits coverage under the reimbursement arrangement to one employee may violate certain non-discrimination requirements applicable to group health plans.

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