Affordable Healthcare Prohibition and Penalties!
By Philip Dickey, MPH, PHR | June 9, 2014
The Affordable Care Act Prohibits Pre-Tax Employer Reimbursement of Individual Health Policy Premiums.
For many years, employers have been allowed to reimburse employees for or directly pay the cost of individual health insurance policy premiums and exclude such amounts from the employee’s gross pay (HRA, MERP, etc). However, recent Internal Revenue Service (IRS) guidance effectively eliminates these “employer payment plans” after 2013 (IRS Notice 2013-54).
The bottom-line is employers will not be able to provide employees with tax-free compensation with which to pay insurance premiums for non-employer-sponsored plans. The reason given, in part, is that such arrangements are considered stand-alone health plans with set limits of coverage — that being the maximum amount of funds the employer promises to contribute. The ACA clearly bans lifetime and annual dollar limits on health plan coverage.
What is allowed, however, are integrated HRAs. These are HRAs that are coupled with an employer’s group health plan that many employers have established under high-deductible health plans for the reimbursement of copays and deductibles (not premiums). Integrated HRAs are only allowed if the employee who has the HRA is enrolled in that health plan.
Additionally, employers who wish to help employees purchase insurance on their own can still do so. The IRS does not prohibit that assistance, but plan years beginning on or after January 1, 2014 will have to do so on an after-tax basis, presumably by increasing the employee’s taxable wages.
The recently announced penalty (May 13, 2014) for continuing to reimburse employees for individual health policy premiums on a pre-tax basis is $100/day per employee. That equates to $36,500 per year, per employee. The IRS prohibition and accompanying penalty applies to large and small employers alike.
Many employers thought they could shift health costs by sending their employees to the individual market or the government health insurance exchange with tax-free compensation to help pay individual health plan premiums – the current administration clearly has said “no” to that approach.