ACA: Are You Reimbursing Employees for Individual Health Insurance Policies?

Stephanie Bunten, CPA, JD, LLM

Some of the most frequently asked follow-up questions from our recent Employer Compliance Workshops have been from employers who reimburse premiums for their employees’ individual health insurance policies. Such arrangements are often referred to as “employer premium payment plans” or “health care arrangements”. Before implementation of the Affordable Care Act (ACA), these arrangements were allowed and often used by smaller employers that did not offer group health insurance coverage in order to provide a pre-tax benefit to their employees.

At the end of 2013, however, the Department of Labor and the Department of the Treasury issued guidance stating that these types of arrangements fail to comply with the market reform provisions of the ACA. A copy of this guidance can be found by clicking here. The penalties for failing to comply with the market reforms are hefty: $100 per day per affected individual. This amounts to an annual penalty of $36,500 per employee who is covered by such an arrangement!

In the wake of these provisions, employers discontinued the practice of reimbursing their employees for individual health coverage on a pre-tax basis. Some employers did not want to deny their employees reimbursement for health insurance coverage and continued the practice on a post-tax basis. In fact, some vendors set up plans in which employers contributed money on a post-tax basis and the vendor would help the employees find individual health insurance coverage and pay the premiums from the employers’ contributions.

On November 6, 2014, the Departments of Labor, Health and Human Services, and the Treasury jointly issued a set of frequently asked questions (FAQ’s) making clear that an employer’s reimbursement of an individual health insurance policy, whether on a pre-tax or post-tax basis, is considered to be a group health plan subject to the market reforms. You can read the FAQ’s by clicking here. Thus, even post-tax payments of individual health policies by an employer violate the annual dollar limit prohibition of the market reforms, with penalties of $100 per day per affected individual.

There are some exceptions to these rules, such as an arrangement that has only one current employee participating in the plan, or an arrangement that reimburses for an “excepted benefit” (i.e., accident-only coverage, certain limited scope dental and vision benefits, etc.). However, these exceptions are narrow, and subject to their own specific rules and considerations. Please contact your tax advisor for guidance as it relates to your particular situation.

So what does this mean for you? If you are paying for your employees’ individual health insurance policies, either on a pre-tax or post-tax basis, you should discontinue the practice immediately and explain to your employees that you are no longer able to provide them with this benefit. If you choose, you could increase your employees’ compensation and allow them to use the additional post-tax money as they wish, whether it be for individual health insurance premiums or another expenditure. The main point is that you can no longer reimburse for your employees’ individual health policies.