IRS Delays Enforcement Action Against Employers Offering Premium Reduction Arrangements in Connection with Student Health Coverage
On February 5, 2016, the Internal Revenue Service ("IRS") issued Notice 2016-17 which provides temporary transition relief for employers that offer premium reduction arrangements in connection with student health coverage. "Premium reduction arrangements" are arrangements designed to reduce the cost of student health insurance (whether fully-insured or self-insured) to students through a credit, offset, reimbursement, stipend, or similar arrangement. Generally, colleges and universities use these types of arrangements to pay for some or all of the cost of student health coverage for their graduate students. Notice 2016-17 announced that the IRS, the Department of Labor, and the Department of Health and Human Services (collectively, "Departments") will not assert that these premium reduction arrangements fail to satisfy certain market reforms of the Affordable Care Act ("ACA") for plan years or policy years that begin before January 1, 2017.
Notice 2016-17 supplements the guidance provided in Notice 2013-54 and Notice 2015-17 which address the application of ACA market reforms to employer payment plans. An "employer payment plan" is an arrangement where an employer either reimburses its employees or directly pays on behalf of its employees, on a pre-tax or post-tax basis, some or all of the cost of purchasing individual insurance coverage. Notice 2013-54 provided that employer payment plans are group health plans subject to the group market reforms of the ACA, including the prohibition on annual dollar limits on essential health benefits. Further, an employer payment plan cannot be integrated with individual insurance coverage in order to satisfy the ACA group market reforms. Because employer payment plans cannot comply with the group market reforms of the ACA on their own and cannot be integrated with individual insurance coverage, employer payment plans are no longer feasible options for employers. Notice 2013-54 was effective for plan or policy years that begin on or after January 1, 2014. An employer sponsoring an employer payment plan after that date is subject to a potential excise tax of $100 a day ($36,000 a year) for each affected employee.
Many colleges and universities provide their graduate students with student health coverage at a reduced cost or no cost as part of their benefit package. If such a student performs services for the institution, this premium reduction arrangement may constitute an employer-sponsored group health plan, and, therefore, an impermissible employer payment plan.
In Notice 2016-17, the IRS recognizes that some institutions may not have realized at the time the IRS issued Notice 2013-54 that their premium reduction arrangements may, in certain cases, constitute impermissible employer payment plans. In order to give institutions additional time to determine whether their arrangements comply with Notice 2013-54, and to make alternative arrangements where needed, the Departments will not take enforcement action against premium reduction arrangements offered in connection with student health coverage for plan or policy years that begin before January 1, 2017. During this temporary transition relief period, colleges and universities should review their arrangements to determine if they need to make changes in order to comply with IRS guidance for future plan years or policy years. Note that this guidance does not grant any relief to colleges and universities who are using student health insurance coverage to satisfy the employer shared responsibility requirement to offer coverage to full-time employees or pay a potential penalty. Since student health insurance coverage is not group health plan coverage, an institution providing such coverage to graduate students who are full-time employees of the institution may also face additional penalties under the employer shared responsibility regulations.
For more information on Notice 2016-17 or for assistance in determining whether your program is in compliance, please contact Mary Beth Braitman, Sarah K. Funke, Melissa Proffitt, Tara Schulstad Sciscoe, Christopher S. Sears, or the Ice Miller Employee Benefits attorney with whom you work.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.