Employers Can’t Reimburse the Cost of Employees’ Individual Health Policies on an After-Tax Basis

As we discussed in a previous post, the IRS issued Notice 2013-54 in September 2013 to discuss the application of the “market reform” provisions of the Affordable Care Act (ACA) to certain employer healthcare arrangements, including, among others, arrangements under which employers pay for employees’ individual health insurance policies, either by paying the insurance company directly or by reimbursing the employee. According to the Notice, an employer arrangement that pays for employees’ individual health insurance policy premiums on a pre-tax basis is an employer health plan subject to the ACA market reform requirements.  As such, according to the Notice, the arrangement automatically fails to comply with those requirements because the annual benefit is limited to the cost of the premiums.  As a result, the employer offering the arrangement could be subject to a Section 4980D penalty of $100 per day per affected individual.  This penalty potentially applies to any employer, even those which are not subject to the “play or pay” penalties because they have fewer than 50 full time equivalent employees. 

The Notice directly addressed only pre-tax payments, and it contained language that seemed to support the proposition that, if the reimbursement payments are made on an after-tax basis, it is considered a “payroll practice” rather than an employer health plan, and the ACA market reform provisions do not apply.  However, in its recently-issued Part XXII of its FAQs, the Department of Labor indicated that this prohibition applies not only to pre-tax, but also after-tax, reimbursements of individual health insurance premiums.

For decades, employers have had a considerable amount of flexibility in helping their employees obtain coverage under individual health insurance plans.  Unfortunately, this flexibility is gone, and employers who are unaware of the changes are potentially exposed to a Draconian penalty if they continue to pay for or reimburse the cost of individual health insurance premiums.

So, now that employers can no longer pay for or reimburse the cost of their employees’ individual health policies, what options are left?  The employers can give the employees a general increase in their compensation, but only if the increase is not contingent upon the obtaining or maintenance of individual health coverage.  It would seem to behoove the employer in this situation to leave a very clear record that the compensation increase is in no way conditional upon the health coverage.

E. Drew Cheney Posted By
E. Drew Cheney