With all the changes to health care and the escalating annual costs, wouldn’t it be more cost effective for employers to simply reimburse their employees for the cost of an individual health plan? Not exactly. In prior years, it was not an uncommon practice for employers to reimburse employees for their health care premiums on an individual policy. As group health plans continued to increase in cost and small employers had less of an opportunity to negotiate for better rates or greater coverage, this option was the easiest way for an employer to help with health care costs that were more reasonable. However, moving forward this strategy for reimbursing employees for individual health care policies won’t be ACA compliant and can subject an employer to penalties.
In 2014, the IRS announced that employers that do not provide group health insurance to employees but instead reimburse employees for their own individual health policies may be subject to an excise tax of $100 per day for each employee. That’s a tax of up to $36,500 per employee. According to the IRS, this arrangement would qualify as an employer payment plan and be viewed as a group health plan. This type of group health plan fails to comply with the ACA’s requirements and triggers the excise tax.
If an employer wants to avoid being viewed as a group health plan and subject to this excise tax then they will need to change how they supplement employees who pay for individual health policies. The fix for this is simple but does not come without it’s own challenges. Employers that want to continue to help employees cover the cost of their individual health policies can do so by giving a pay increase. The employer cannot condition this increase on the purchase of health care coverage and should not endorse any particular plan or individual. Doing any of those could trigger the classification of a group health plan and then make the excise tax applicable. Employers can indicate that the compensation increase is being given to help the employee purchase individual health coverage but nothing more should be endorsed and verification of coverage should not be requested. The pay increase cannot be taken away if coverage is not obtained and that increase will be taxable income. According to the IRS, this strategy will be the one that is available to employers who wish to continue this practice.
Employers subject to the ACA (50+ employees) but that aren’t yet considered applicable large employers (100+ employees) have been given a transition relief from this tax penalty. This transition relief from the excise tax is a temporary delay meant to help employers of 50-99 employees obtain group health coverage and adopt procedures that are ACA compliant. Use this transition relief period to evaluate your options and build a strategy for the 2016 year before the excise taxes kick in.