More on Section 105 plans

A reader commented on my vague discussion in an earlier post about the difference between an employee benefit plan and a payroll accommodation plan. The first type is regulated and subject to ACA market reforms and the second type is not. Describing the distinctions is not something that I feel could be usefully summarized in a blog post. Moreover, the issue is larger than the immediate question of what is a “group health plan” under ACA.

I replied the the comment:

Thanks for that feedback (xxx). I concluded that the real issue was my weak choice of language in the original post so I rewrote that section for a higher degree of clarity: “Any type of employer-sponsored employee benefit plan (such as described in section 105 of the Internal Revenue Code that incorporated individual health insurance is a problem under the ACA rules. In sharp contrast, an arrangement that is payroll payment accommodation and NOT an employee benefit plan is OK and does not trigger a penalty. The distinctions between an employee benefit plan and a payroll system accommodation are beyond the scope of this blog post but are covered in IRS Notice 2013-54 and 2015-17.”

The main point for us to keep in mind that IRS and DOL have certain specific measures that cause a business practice to rise to the level of a regulated employee benefit plan under ERISA and ACA and other considerations, Stay below that threshold and avoid the laws altogether. I still don’t feel like it is smart to attempt to address the distinction of what is and what is not an “employer health plan” in a blog post. This has been the subject of past litigation and and will certainly be the topic of future litigation. I know that there are many examples of court cases where owners intended arrangements to be unregulated and the service or DOL prevailed as asserting applicable regulation. Recently IRS issued unpublished unfavorable guidance against the largest issuer of so-called “section 105 workaround solutions” indicating that the widely sold product in the small business market does not perform as advertised. Those who bought into it are likely still clueless. Also, there are plenty of court cases exactly the opposite. So, in any case, this is a complex topic that we should simply be aware of.

I prefer not to write the names of specific third-party products that may be a problem for our clients but tax practitioners should be aware that IRS is apparently willing to issue informal guidance on request. All of my IRS communications on this topic have been verbal but at least one colleague has obtained a written unfavorable opinion against a market-leading “Section 105 plan” being sold to small businesses.


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