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Human Resources

IRS: Employers Can No Longer Pay Employees for Individual Health Premiums Pre-Tax

affordable care actMany employers have given workers pre-tax dollars to help them pay for their own individual health coverage. But now, a recent IRS ruling concludes the practice is no longer legal under the Affordable Care Act.

In the wake of the ACA, some employers were hopeful that they could send their employees to the exchanges and reimburse them for their premiums, to avoid having to offer an employer-sponsored plan. However, the IRS says that arrangement doesn’t satisfy the health care reform law. Employers who continue the practice could be hit with a tax penalty of $100/day for each employee.

The premium payments have been used in the past when an employer does not want to put new employees on its plan right away and instead pays for the premiums charged by former employers’ plans, which the new employees continue to qualify for under COBRA. Also, payments might have been used to purchase catastrophic health insurance on the individual marketplace or Medicare supplemental plans.

“As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing,” said the IRS. “Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.”

The IRS also pointed out that Notice 2013-54 explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements, health flexible spending arrangements and certain other employer health care arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy.

FrankCrum Tax Manager Dana Spinello, CPA, suggests that if employers want to help their employees buy insurance on their own; paying additional money may be an option. However, keep in mind that the money would be treated just like any other wage in the payroll process.

Important Legal Notice: The purpose of this information is to assist in the discussion of risk, concerns and general requirements. It is not legal advice or judgment of a business’s compliance or non-compliance. It is recommended that you seek qualified legal counsel familiar with your particular circumstances before taking any action.

For more information on how the ACA affects your business, download our resources kit.

David Peasall, VP, Human Resources
David Peasall, VP, Human Resources

David Peasall joined FrankCrum in 2010. Since that time, he has served as the Vice President of Human Resources. Serving in the Army, he began his 20+ year career in human resources and benefits administration and has held several management positions within the corporate and public human resources environments overseeing employee benefits sales and administration, recruitment, compensation, employee relations, organizational development, and compliance. He has the nationally recognized designation of Senior Professional in Human Resources (SPHR), PPACA certification from NAHU, and a Bachelor’s degree from Barry University with a dual major in Human Resources Management and Health Services Administration. He has written for the Society for Human Resources Management, HR Insight, Proyecto Magazine, and for online publications in the restaurant and health care industries. While not at work, this Florida native loves spending time with his family, preferably boating, fishing, and diving the beautiful waters of Florida.