Many small business owners have followed a practice of helping employees with the cost of individual health insurance policies rather than sponsoring an employer group health insurance plan.  Employers would reimburse employees for some or the entire premium or would pay the insurance company on behalf of the employee.  This has been a gray area for tax purposes.

That changed on July 1, 2015.  Employers may be subject to a $100 / day excise tax per applicable employee; that equals $36,500 per year per employee, for paying individual health insurance premiums.  This is a provision of the Affordable Care Act (ACA) that had been deferred through June 30, 2015.

An employer payment plan is any arrangement through which an employer pays, directly or indirectly, an employee’s premiums for major medical coverage purchased in the individual market (either inside or outside the Health Insurance Marketplace).  IRS Notices 2013-54 and 2015-17 explain that employer payment plans are considered to be group health plans that are subject to the market reforms that apply to group health plans under the ACA and cannot be integrated with individual policies to satisfy those requirements.  There are similar limitations for an employer that reimburses Medicare premiums to an employee.

http://www.irs.gov/Affordable-Care-Act/Employer-Health-Care-Arrangements

Two other options are addressed in Notice 2015-17:

1 – Q.  Is it considered an employer payment plan if the payment for the individual insurance is treated as taxable income to the employee?
1 – A.  Yes.  The arrangement is subject to the market reform provisions of the ACA applicable to group health plans without regard to whether the employer treats the money as pre-tax or post-tax to the employee.

2 – Q.  If an employer increases an employee’s compensation, but does not condition the payment of the higher wage on the purchase of health coverage, is this arrangement an employer payment plan?
2 – A.  No.  The arrangement described above does not meet the description of an employer payment plan.  Therefore, it is an allowable option as long as it is not connected to the employee’s purchase of health coverage.

Consult your health insurance agent and your tax advisor if you need to take action to avoid these penalties.  You may contact me at brianmcpike@comproins.com.

by Brian McPike, President
ComPro Insurance

402-488-5100 | www.comproins.com