Individual Health Insurance Affordable Care Act 1000px
By: Glenn Schanel, CPA
on October 19, 2016

Since 1961, an employer was permitted to reimburse an employee for some or all of the premium expenses incurred for an employee’s individual health insurance plan and exclude that payment from the employee’s income.  However, with the passage of the Affordable Care Act, reimbursement plans were rendered obsolete. As explained in Notice 2013-54, the IRS made it clear that these reimbursement plans would be considered group plans and therefore violate certain Affordable Care Act requirements.

Following that notice, many observers expected the IRS to allow employer reimbursement plans as long as the payments were treated as taxable income.  However, in 2015 the IRS published Notice 2015-17 and clarified that these arrangements can be considered a group health plan without regard to whether the employer treats the reimbursement as pre- or post-tax to the employee.  In other words, even after-tax reimbursement of individual health plans will trigger an excise tax on small business.

The Notice also indicates that even one-off arrangements with employees that increase their wages to pay for individual health insurance could be considered a group plan.  Business owners should, therefore, avoid any kind of reimbursement arrangement, and make sure that any adjustments to compensation are not tied to the purchase of an insurance policy.

And the penalty is steep.  As of June 30, 2015, group health plans that do not satisfy the market reforms of ACA are subject to excise taxes of $100 per day per affected individual until corrected.  If the violation of the employer’s plan continues for an entire year, the excise tax would be $36,500 per individual.



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