Updated on Thursday, 26 February 2015
Please note: The IRS rulings referenced below do not apply to participants in the UCC Medical Plan. There are also no tax liabilities if your church pays for coverage through the UCC Plan. Churches that do not participate in the UCC Medical Plan are encouraged to seek tax advice and counsel from their own attorneys and/or tax advisers.
Since 1961, Internal Revenue Service Ruling 61-146 has authorized employers (churches) to reimburse employees on a pre-tax basis some or all of the cost of purchasing individual health insurance coverage. Many congregations have relied on this revenue ruling to reimburse pastors and lay employees for the cost of individual health insurance coverage or to pay the premiums for such coverage directly to the insurance company on behalf of employees. These arrangements are commonly referred to as employer payment plans, and are sometimes provided through stand-alone health reimbursement arrangements (HRAs).
The IRS recently began to issue guidance as to the application of the Affordable Care Act (ACA) coverage mandates to employer payment plans and stand-alone HRAs, and declared that pre-tax reimbursement of individual health insurance premiums, or direct payment of individual health insurance premiums through a stand-alone HRA, fails to satisfy the ACA’s coverage mandates. So, if as a minister or lay employee you are reimbursed for insurance purchased on the marketplace exchange, privately or through your spouse/partner, it is a taxable event according to IRS guidance.
In additional guidance, the IRS provided that even if an employer reimburses premiums under an employer payment plan or directly pays individual health insurance premiums on an after-tax basis, the arrangement fails to satisfy the ACA’s coverage mandates.
On February 17, 2015, the IRS issued transition relief from excise tax penalties under the ACA for small employers (those with fewer than 50 full-time equivalent employees) for violations of the ACA “Market Reforms” by offering “employer payment plans” to employees to purchase or reimburse individual policies of health insurance.
The transition relief frees small employers from the excise tax penalties for these plan failures from January 1, 2014 through June 30, 2015. After June 30, 2015, small employers may be liable for the tax if they haven’t complied with the IRS requirement. (For more information, please see IRS Notice 2015-17.)
Specifically, this IRS guidance means that a congregation can no longer reimburse an employee for the cost of his or her health insurance policy or pay the cost of such policy directly to the insurer, on either a tax-free or after-tax basis, regardless of whether the coverage was purchased through the health marketplace or through the private market, without incurring significant penalties.
Churches that currently offer employer payment plans – on either a pre-tax or after-tax basis – should replace those plans with another option to avoid substantial penalties. Two alternatives that should be considered include the following: