IRS Health Care Reimbursement Guidance Generates More Questions, Opposition


The Grant Advisors have been following on ongoing controversy over a new guidance from the IRS that impacts the way smaller nonprofits handle payments of health insurance premiums for their employees under the Affordable Care Act.

For decades, many smaller organizations unable to provide group health insurance coverage for employees chose instead to reimburse individual health insurance policy premiums for staff, the Evangelical Council for Financial Accountability says.

But the IRS issued guidance indicating that these arrangements violate key provisions of the ACA and must now be considered taxable compensation to employees.

The notice says that such plans violate ACA because they impose an annual limit of the cost of the individual insurance policy purchased through the arrangement and do not provide preventive services without cost sharing in all instances. According to the IRS, employer payment plans cannot be integrated with the individual insurance policies purchased under the plans in order to satisfy ACA. That means that employer payment plans will violate the requirements of the ACA even if the employees purchase individual insurance ACA approved policies, the guidance said.

By eliminating these pre-tax reimbursements, the IRS indirectly imposes a significant tax increase on thousands of individuals who serve on the staffs of smaller charities, ECFA President Dan Busby says. While health care insurance premiums can be reimbursed post-tax, employees who do not receive section 36B tax credits will sacrifice a significantly higher amount of their limited resources to keep health insurance, Busby says. The new rules will disproportionately affect church and nonprofit workers, their families, and their charitable endeavors across the nation, Busby says.

An employer is still allowed to establish an arrangement under which an employee may choose between cash or an after-tax amount to be applied toward health coverage, the IRS said. The employer is just not permitted to provide reimbursement on a pre-tax basis. In addition, the notice would permit an employer to establish a payroll practice of forwarding post-tax employee wages to an insurance company at the direction of the employee, as long as it meets the ACA requirements.

Delay Sought

Busby notes the January 2014 effective date has been insufficient to allow many organizations time to learn about the changes and come into compliance. ECFA has asked the IRS postpone the effective date relating to the treatment of employer payment plans until Jan. 1, 2015.

About Frank Klimko

Frank Klimko is a nationally known journalist, grants expert and speech writer/speaker. He has years of experience helping nonprofits devise lists of the right funding opportunities and secure funding from these foundations and corporate entities. Clients have focused on an array of areas including child care, homeless, hunger and K-12 education. Additionally, he is a Freedom of Information Act expert, who has helped numerous clients with securing proprietary information from the federal government. Currently, Frank Klimko writes the Children & Youth Funding Report and Private Grants Alert, which are Washington DC-based publications. CYF is a daily publication covering Congress, the Education Dept. and the various federal regulatory agencies. PGA, another daily publication, covers the world of private philanthropy.
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