Premium Reimbursement Can Be a Costly Violation

Employee Benefit Advisor magazine recently published a timely article (PDF copy at bottom of this blog post) regarding Individual Health plans for Employees, premium reimbursement, and the rules as it relates to the ACA (also known as Obamacare).  The rules get tricky so it's important to stay on top of the latest changes and updates released by HHS and the IRS.

The article starts by talking about ACA compliance as it relates to employer premium reimbursement plans:

"...Employer payment plans (sometimes referred to as premium reimbursement plans) for individual health insurance coverage fail to comply with the Affordable Care Act.  Employers that violate this rule are subject to an excise tax of up to $100 per day ($36,500 per year) for each affected employee.  An employer payment plan is an arrangement in which an employer reimburses employees or pays directly for all or part of the premium for individual coverage. These employer payment plans are considered to be group health plans that do not comply with the requirements of the ACA. An employer cannot reimburse employees for the purchase of an individual market policy, regardless of whether the employer treats the payment as a tax-­free benefit or as additional taxable wages to the employee."

More details are provided in the PDF of the article below, but some key highlights as it relates to some transition relief from the penalties and requirements, are as follows:

"Temporary relief for small employers earlier this year, the IRS issued Notice 2015­17, which provided transition relief from this $100­ per ­day excise tax. In the notice, the IRS recognized that many small employers provide health coverage by paying directly or reimbursing the cost of premiums for individual policies, and outlined the relief as follows:

Small employers with fewer than 50 full-­time employees (for at least six consecutive months) will not be subject to the penalty for either 2014 or for the period January 1, 2015, through June 30, 2015. This means, however, that small employers are now “on the clock” to fix this payroll practice before the middle of 2015.

All hope is not lost for small employers that have this type of arrangement with their employees. Employers have the right to provide compensation increases to their employees. So long as the employer does not require that an employee use the increase to purchase health coverage, an employer payment plan is not created.  The extra pay will be subject to income and payroll taxes. The employee can do whatever he or she pleases with this extra pay, whether that includes or does not include purchasing an individual health insurance policy."