What, you may ask? That’s right. It no longer works to reimburse employees for the purchase of an individual health insurance policy. I know, many of you have always done this. Well, not any longer under guidance issued under the Affordable Care Act (ACA). Beginning with an IRS Notice issued in September 2013 and most recently in November 2014 DOL FAQs, the federal government has made it clear that this practice does not work under the ACA. While it flew under the radar for some, this rule became effective in 2014.
Why, you may ask? When an employer reimburses an employee for an individual health insurance premium, or pays the premium directly to the insurer, it has (perhaps inadvertently) established a “group health plan” which is subject to the so-called Public Health Service Act mandates of ACA. One of these mandates is the requirement that group health plans cannot impose annual dollar limitations on essential benefits, and such a reimbursement arrangement by its very nature imposes an annual dollar limit (the cost of the premiums); guidance provides that this arrangement cannot be “integrated” with an individual policy to satisfy the Public Health Service Act mandates. Another mandate is the requirement to provide preventive care at no cost to participants. A reimbursement arrangement such as that described here does not and cannot provide preventive care.
So, what’s the harm? The consequences for violation of the Public Health Service Act mandates (for self-funded plans such as a typical reimbursement arrangement) are nondeductible excise taxes of $100 per day for each affected individual (that’s $36,500 per year per impacted employee) which are supposed to be self-reported to the government, as well as potential enforcement action by the Department of Labor or participant lawsuits.
But this shouldn’t apply to me since I tax my employees on the amount of the premium I reimburse/send to the insurer, right? Actually, this rule still applies. The November FAQ makes it abundantly clear that characterizing the payment or reimbursement as taxable wages does not “undo” its group health plan status, and thus, the arrangement can still not satisfy the Public Health Service Act mandates.
What am I supposed to do? I don’t want to buy a group health plan for my employees but I don’t want them to go without health insurance/need to offer this benefit to attract employees. The answer is simple, although not as advantageous from a tax perspective. Employers can simply increase an employee’s wages so that the employee can purchase an individual insurance policy. An employer cannot condition the receipt of those additional wages on the employee’s purchase or maintenance of such a policy, as that then becomes an after-tax impermissible reimbursement arrangement.
There has to be an exception, right? Not really. Any employer-sponsored plan subject to the ACA market reforms – generally any plan with more than one current employee participating – is subject to this prohibition. This applies regardless of whether the employer is an “applicable large employer” subject to the employer mandate (i.e., the “pay or play rules”).