You might be wondering, “Can I reimburse my Employees for Health Insurance?” This is a great question, and one that has been on the minds of many employers and lawmakers in recent months.
There’s a lot of confusion surrounding new ACA laws. Especially when it comes to whether or not an employer reimbursement of health insurance premiums is legal.
What Exactly Are We Talking About Here?
We are talking about employers (who don’t offer a group medical plan) offering to reimburse their employees for the cost of their personal health insurance plan premiums.
It’s understandable why a small business owner may want to move away from offering a costly group health plan and opt to offer employees a stipend to purchase their own health care insurance. There have been valid arguments on both sides – not helping the matter.
This is a very interesting discussion among employers, brokers, and health insurance providers today, and it’s very important you understand why this should not be done (hint: it involves avoiding large fines).
Self funded group plans have gotten more and more expensive since Obamacare was introduced. Beyond the financial burden, group plans are often inconvenient in many ways. Not only are they difficult for small businesses to obtain and administer, it’s hard to please every employee.
Employer Payment Plans in Question
Employer Payment Plans, or EPPs, are being implemented as a solution to avoid costly and complicated group plans. In an EPP the employee is encouraged to select their desired individual plan and then submits the amount it costs them to their employer for reimbursement later.
Makes sense right? Not to big brother… employer payment plans under ACA could expose you to expensive penalties depending on how you are distributing the reimbursement.
No More Employer Payment Plans Under ACA
Obamacare contains certain market reforms that apply to group health plans. While there are countless aspects of market reform, there are two in particular that we care about when looking at this topic:
- A group health plan may not establish an annual limit of benefits for any individual, and
- A group health plan must provide certain preventative services without imposing any cost-sharing requirements on the insured.
Under IRS Notice 2013-54, an EPP that reimburses employees for an employee’s individual insurance policy premiums cost is a group plan, and must also satisfy these two market reforms.
Conclusion: EPP’s no longer work because they are considered a group plan and they do not meet the current requirements of group plans like annual limits and no preventative services.
Some say…treating such reimbursements as ordinary income for the employee, reporting as regular W-2 income, subject to all applicable taxes and other legal deductions is acceptable under the law at this point.
But… the DOL has provided additional clarity on this subject through an FAQ issued in November of 2014. They stated that an EPP violates market reform without regard to whether the employer treats the money as pre-tax or post-tax to the employee. As a result, having the employer simply recharacterize the reimbursement as taxable compensation to the employee accomplishes nothing.
Here’s a quote directly from the FAQ on the DOL website:
Any reimbursement scheme constitutes a group health plan, according to the Labor Department. This designation is important, because the government had already decided that a group health plan must comply with certain market reforms in the Affordable Care Act, including one that bans dollar limits for certain benefits. And a plan that reimburses members for individual policies simply cannot comply with those requirements, according to the agencies. – DOL’s FAQs about Affordable Care Act Implementation (Part XXII)
You can read the full FAQ here.
What’s the Risk?
If you don’t get this right, your business could be hit with a penalty of $100 per day, per employee under Section 4980D. (See IRS Notice 2013-54.)
Yes, that’s $36,500 per employee paid an EPP over the last year. Yikes!
So, Do You Want to Walk the Line?
This issue continues to prove complex and is the focus of much debate. The tax and benefits lawyers contacted by You’re the Boss offered a few different perspectives on the Labor Department’s answers based on their own interpretations.
Now, you may be thinking, “Well, then I’ll just tax the reimbursement or issue it to the employee as a raise.” Not so fast… Sarah L. Fowles chimed-in on the controversial subject writing; “Reimbursing employees for their individual insurance premiums on a post-tax basis can still create a ‘group health plan,’ according to my informal discussions with the Department of Labor.”
Considering the possible fines your business could face, why take a chance and dance close to the fine lines the IRS and other government agencies have drawn?
So What Does All this Mean?
According to Tony Nitti, “If you are reimbursing an employee for a plan purchased on the individual market, whether those payments are taxable or tax-free has no bearing on whether the reimbursement ‘plan’ you are offering can be integrated with the plans purchased by the employees. It is clear, then, that the same violations of market reform exist in either instance.
Thus, to avoid a potential $36,500 penalty per employee, more drastic measures are needed — the employer must eliminate all appearances of a plan.
Stated in another manner, an employer can no longer offer any type of direct-pay or reimbursement of an employee’s premiums without exposing themselves to the penalty. In fact, the employer should not even inquire whether the employee has insurance. Instead, if the employer wishes to facilitate the employee’s purchase of insurance, the employer should either:
- Establish a group plan that satisfies the market reform requirements, or
- Simply pay the employee additional compensation without any requirement that the amount be used for insurance premiums. The employee must be free to do with the extra compensation whatever they choose.”
Likewise, Fowles suggests the only option is to offer a raise to all employees. A raise that is not conditional on whether the worker actually buys health insurance with it. The Internal Revenue Service’s approach, she said, “requires employee choice about how an employee uses his or her extra after tax amounts – the employee must be able to use the after-tax amounts for health insurance or whatever else he or she wants.” When you get to this point, you’re simply looking at giving an employee a normal raise, completely unrelated to whether they have selected an individual health plan or not.
This is just one example of the many complex questions you face on a daily basis as a business owner today. Our mission is to make your life easier by allowing you to toss the compliance burden from your shoulders and get back to running your business. You can learn more about how we do this by downloading our 1 payment 50 solutions PDF.