Reimbursing your employees for individual health insurance? Not so fast.
Medical practices often ask if the Affordable Care Act requires them to provide health insurance to their employees. The short answer is, probably not, unless the practice is an Applicable Large Employer (ALE); generally one with 50 or more full time employees or equivalents.
However, many smaller practices decide to do so anyway and, of course, that’s allowed. As an alternative, other practices have decided that it’s easier, and sometimes less expensive, to just pay for the employees’ individual health insurance policies instead of continuing, or adding, a group health plan for the practice.
Maybe it is cheaper on its face but beware – a group that pays for its employees’ individual policies, directly or indirectly, may be subject to a severe excise tax penalty; $100 per employee per day, or $36,500 per employee per year. This is the case whether the reimbursement is made on a pre-tax or an after tax basis. And, it applies whether the individual policy was purchased from a government marketplace or directly from an insurance company. According to the Internal Revenue Service, this type of premium reimbursement arrangement, an “Employer Payment Plan”, is a group health plan; albeit a group health plan that does not satisfy the market reform provisions of the Affordable Care Act.
This excise tax penalty is already in effect but there is transition relief that covers all of 2014 and through July 1 of this year. In other words, if such a program is in place but ends by the end of June the practice can avoid the excise tax penalty.
By the way, this penalty does not apply to a plan that had fewer than two participants who were current employees on the first day of the plan year. Moreover, additional guidance for S Corporations has not been released yet so it appears that no excise tax penalties will be assessed to S Corps at least through the end of 2015.
Finally, employers are allowed to increase employees’ taxable income to assist with payments of individual market coverage but only if the payment of additional compensation is not conditioned on the purchase of health coverage. In other words, the increased pay must be given “without strings attached”. The employee can use the pay raise to purchase health insurance but is not required to do so.
As always, this article is intended as general information and we strongly recommend that you consult with your tax or legal advisors before taking any action.
Additional information can be found at the Internal Revenue Service’s website. Here is a link to the page that includes some basic questions and answers about these premium arrangements as well as links to much more detailed IRS information:
- Chip Moynihan, Director of Health Programs, PIAM