May 14, 2015
Employer premium reimbursement plans for individual health insurance coverage fail to comply with the Affordable Care Act (“ACA”), according to the Internal Revenue Service (“IRS”), Department of Labor (“DOL”), and Department of Health and Human Services’ recently issued frequently asked questions (“FAQs”). Employers that violate this provision of the ACA are subject to an excise tax of up to $100 per day ($36,500 per year) for each affected employee, according to the FAQs.
A premium reimbursement plan is an arrangement where the employer reimburses employees or pays directly for all or part of their premiums for individual health insurance coverage. An employer who pays part or all of an employee’s premium to purchase individual market health coverage violates the ACA, regardless of whether the employer treats the payment as a tax-free benefit or as additional taxable wages to the employee. In February, the IRS issued Notice 2015-17, which provides transition relief from the $100-per-day excise tax for small employers with fewer than 50 full-time employees until June 30, 2015.
While most premium reimbursement plans must be eliminated, employers can, however, provide compensation increases to their employees so long as the employee does not have to use the increase to purchase health coverage. Any compensation increase will be subject to income and payroll taxes, and the employee can do whatever he or she pleases with the extra compensation. In addition, there are other plan design considerations that allow employers to maintain a premium reimbursement arrangement where the employer offers other ACA compliant health coverage.
The transition relief does not apply to employers with more than 50 full-time employees or to standalone health reimbursement arrangements. Large employers in violation of the law are required to file Form 8928 and report the excise tax.
Please remember that employers may NEVER offer an employee a cash incentive to waive plan coverage. The DOL considers this discrimination against the employee based on his or her health status which violates the Health Insurance Portability and Accountability Act, the Employee Retirement Income Security Act, and the ACA.
What this means to you – Small employers that reimburse employees or pay directly for all or part of employees’ premiums for individual health coverage have until June 30 to get into compliance. Employers should take advantage of this transition relief and seek other ways to contribute to employees’ health care costs.