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Leviticus 19:32 - You shall stand up before the gray head and honor the face of an old man, and you shall fear your God: I am the Lord

Many churches strive to honor long-serving ministers and care for them well, even as some go to part-time status. Often, we see church clients who want to provide (and pay some or all of the cost of) Medicare supplemental plans for their Medicare-eligible employees. That can be a fantastic benefit with great value to older employees. It’s important to do this correctly and navigate the lurking minefield of ERISA, Affordable Care Act (“ACA”), Medicare Secondary Payer (“MSP”), and IRS penalties. Below are three key areas of compliance considerations for churches seeking to care well for their “hoary heads” in vocational ministry.

1. Medicare Secondary Payer Rules.
   • General Rule. In general, the MSP rules prohibit employer-sponsored group health plans from “taking into account” the Medicare entitlement of a current employee or a current employee’s spouse or family member. Further, if Medicare will pay secondary to (i.e., after) an employer-sponsored group health plan for covered active employees and their dependents, the MSP rules prohibit an employer from offering any “financial or other incentive” that encourages an individual eligible for or entitled to Medicare to waive coverage under the employer-sponsored plan in favor of Medicare coverage. The federal agency that oversees Medicare, CMS, currently takes the position that, under these rules, employers may not “subsidize, purchase, or be involved in the arrangement of an individual supplement policy for the employee or family member.” In other words, if the employer-sponsored plan would be primarily responsible for paying a claim, Medicare doesn’t want taxpayers to pay.
   • Exceptions to the MSP Rules
     • Small-Employer Exception for Age-Based Medicare Applicable to Many Churches – Less than 20 Employees. The MSP rules do not apply for individuals with age-based Medicare coverage if the employer sponsoring the group health plan has fewer than 20 employees in at least 20 weeks in the current or prior calendar year. Consequently, a small employer may reimburse or pay for Medicare Part B, Part D, or Medicare supplemental coverage, subject to the additional legal considerations discussed below.
     • Exception for Disability-Based Medicare. The MSP rules do not apply for individuals with disability-based Medicare if the employer sponsoring the group health plan has fewer than 100 employees on a typical business day in the prior calendar year. Consequently, a small employer may reimburse or pay for Medicare Part B, Part D, or Medicare supplemental coverage, subject to the additional legal considerations discussed below.
   • No Exception for End-State Renal Disease (“ESRD”)-Based Medicare. The MSP rules will apply to any sized group health plan for the first 30 months of an individual’s ESRD-based Medicare eligibility or entitlement. There is no small employer exception, which means a small employer generally cannot reimburse or pay for the individual’s Medicare Part B, Part D, or Medicare supplemental coverage.
   • Need to Carefully Monitor Excepted Status. Using the small employer exception is a very helpful way to provide cost-effective supplemental coverage to older vocational ministers and has real value to the employee. If this is a desired arrangement, it is important to monitor status carefully. These various exceptions interlock and overlap. If the church inadvertently fails to qualify for an applicable exception (say, by hiring that 21^st employee) and continues to operate like an exception applies, the potential exists for MSP rule violations and substantial excise taxes and other potential penalties.
2. Employer Payment Plan – Affordable Care Act Healthcare Reform Rules.
   • General Rules. Pursuant to applicable IRS guidance, if an employer reimburses an employee for some or all of the premium expenses incurred for non-employer-sponsored health insurance or directly pays a premium for non-employer-sponsored health insurance, the arrangement is generally an “employer payment plan.” The employer payment plan is further considered a group health plan under the Internal Revenue Code if it covers two or more active employees. Such arrangements are subject to the ACA healthcare reform requirements for group health plans including the annual dollar limit prohibition and preventive services requirements. Absent integration with a comprehensive group health plan, an employer payment plan will run afoul of these requirements.
   • Medicare Premium Reimbursement Integration. An employer payment plan that reimburses Medicare Part B or Part D premiums is integrated with another group health plan offered by the employer for ACA healthcare reform purposes if: (1) the employer offers a group health plan that is not limited to excepted benefits and provides minimum value; (2) the employees covered by the employer payment plan are enrolled in Medicare Parts A and B; (3) the employer payment plan is only available to employees who are enrolled in Medicare Parts A and B (or Part D); and (4) the employer payment plan only reimburses Medicare Part B or Part D premium and excepted benefits, including Medigap or Medicare supplement premiums.
   • Note to Limit Reimbursements. To the extent the arrangement reimburses or begins reimbursing Medicare Part C premiums, there is a concern that the arrangement may no longer meet the integration requirements described above.  Without integration, the employer payment plan would not comply with the ACA healthcare reform requirements and become potentially subject to excise taxes and other penalties under the Code and ACA.
3. Employer Payment Plan - Tax Considerations. When an employer establishes an employer payment plan with favorable tax treatment (i.e., it is provided on a pre-tax basis) certain substantiation and non-discrimination requirements must be met to maintain the pre-tax benefit advantage.
   • Substantiation Requirements. Pursuant to applicable IRS guidance, employer payment plans that reimburse substantiated premiums for non-employer sponsored health insurance are excludible from an employee’s gross income under Code Sections 105 and 106. This exclusion also applies if the employer pays the premiums directly to an insurance company.  In short, the exclusion of income applies when the employer has proof that the insurance is in force and being paid for by the employee (or employer on the employee’s behalf).
   • Nondiscrimination Testing. For payments to be excludible from income under Code Section 105, the IRS requires that a group health plan not discriminate in favor of highly compensated individuals (which generally includes the highest paid 25% of all employees), meaning that better benefits cannot be offered more favorably to highly compensated employees as compared to non-highly compensated employees. In other words, the employer payment plan generally cannot be offered to only the Senior Pastor and C-suite staff while excluding the rest of the staff. It is important to work with your accountant or other tax or benefit compliance vendor to ensure nondiscrimination testing occurs regularly.  
   • After-tax Arrangement Alternative. To avoid the nondiscrimination testing requirements and/or the substantiation requirements, the reimbursements can be provided to covered employees on an after-tax basis. However, regardless of whether provided on a pre-tax or after-tax basis, such employer payment plans must continue to comply with the ACA healthcare reform requirements described above.