The Internal Revenue Service (IRS) recently released four information letters on individual insurance policy and opt-out arrangements. Highlights can be found below.

Opt-Out Arrangements

In IRS Information Letter 2016-0023, the plan design is that of a governmental employer that pays additional taxable compensation to employees who opt out of the employer’s group health plan and have other health coverage. The letter states the following: 

  • Opt-out payments are permissible and do not violate health care reform rules against paying for individual policy arrangements so long as the additional taxable compensation is unrelated to the cost of the employee’s other coverage.
  • Opt-out arrangements may affect affordability calculations when calculating employee contributions for employer-sponsored coverage (per IRS Notice 2015-87). See the January 6, 2016 HUB International Client Bulletin on IRS Notice 2015-87 for more details on this major consideration for Applicable Large Employers.    

Reimbursement of Individual Insurance Policy Premiums Permitted for Certain Small Plans

IRS Information Letter 2016-0005 addresses an employer with only one employee. The letter states the following:

  • An employer reimbursing for individual health insurance premiums is permitted because health care reform rules do not apply to a plan that has fewer than two participants who are active employees.  

Certain S Corporation Arrangements Permit Individual Insurance Policy Reimbursement

IRS Information Letter 2016-0021 addresses an S corporation with a more than 2% shareholder-employee health care arrangement that pays for or reimburses premiums for individual health insurance coverage for a 2% shareholder. The letter states the following:

  • The payment or reimbursement must be included in income.
  • Premiums are deductible by the 2% shareholder-employee under Code § 162(l).


Reimbursement of Individual Insurance Policy Premiums Not Permitted Unless Combined With Compliant Employer Plan

In the IRS Information Letter 2016-0019, the IRS reiterates that IRS Notice 2013-54 continues to apply to prohibit reimbursement of individual policy premiums with narrow exceptions. The letter also states the following:

  • Employers that pay for or reimburse individual policy premiums violate health care reform requirements (e.g., the prohibition against annual dollar limits on essential health benefits).
  • Employers are permitted to combine such an arrangement with a compliant employer group health plan, such as an ACA-compliant major medical plan combined with a reimbursement arrangement that is not ACA-compliant.
  • Employers are permitted to provide additional taxable compensation to employees for any purpose (including if they use it for individual policy premiums) if they do not want to offer group health plan coverage. Employers should be aware of the potential impact this decision would have if violating the employer mandate if an employee received a premium tax credit on the exchange.

Next Steps

  • Employers with similar arrangements should be aware of the potential compliance problems that could result in excise tax penalties if paying or reimbursing employees’ individual health insurance premiums. 
  • For complete details, see the information letters hyperlinked in the article.