Employer Reimbursements of Individual Health Insurance Policies

June 30, 2015: Deadline Update
July 29, 2015

Transition relief for small employers paying employee's health insurance premiums has ended for small employers. As of June 30, 2015, the penalty for violating the market reform restrictions is now a $100-per-day, per-employee penalty/excise tax, or $36,500 per-employee, per-year. For plan years beginning after 2013, the Affordable Care Act (ACA) has instituted their market reform provisions that place new restrictions on group health plans. With a limited exception, these new provisions significantly restrict an employer's ability to reimburse employees for premiums paid on individual health insurance policies, and are levying hefty fines for those that are not in compliance. Is your small business subject to these penalties?

Determining if your Company is a Small Employer  

To be classified as a Small Employer, a business will have fewer than 50 full time employees or full time employee equivalent on average during the prior year. The transition rule for 2015 allows an employer to use any consecutive six months period in 2014 to measure the workforce size, instead of the entire year in 2014. Full time employees average 30 hours of service per week during a calendar month. A full time employee equivalent for a month is calculated by: combining the number of total hours of service of all non-full time employees for the month (excluding employees who performed 120 hours of service), and dividing the total by 120. Small employers can be made up of full time and part time employees who qualify as full time employee equivalents. Seasonal workers, government workers, and employers with a common owner are exceptions noted in the IRS Affordable Care Act Topics. For more information, the website is:http://www.irs.gov/Affordable-Care-Act/Employers/Determining-if-an-Employer-is-an-Applicable-Large-Employer

The New Changes

Previously, many employers reimbursed employees for premiums paid on their individual health insurance policies (referred to as an employer payment arrangement). These arrangements have long been popular with small employers who want to offer health insurance but are unwilling or unable to purchase group health coverage. However, with the expiration of the transition relief on June 30th, employer payment arrangements will no longer be an alternative for small employers. These measures violate the new market reform provisions, and employers can now be liable for the $100 per day, per employee excise tax.

Limited Exception for One-employee Plans. 

The market reform provisions do not apply to group health plans that have only one participating employee. Therefore, it is still allowable to provide an employer payment arrangement that covers only one employee. Note, however, that nondiscrimination rules require that essentially all full-time employees must participate in the plan.

Acceptable Alternatives
Now that transition relief for small employers has ended, it can seem daunting making the required changes to avoid the excise tax. There are still options available! Employers can do the any of the following, and avoid the penalties:
  • Provide a tax-free fringe benefit by purchasing an ACA-approved employer-sponsored group health plan. Small employers with 50 or fewer employees can provide a group health plan through the SHOP Marketplace. A cafeteria plan can be set up for pretax funding of the employee portion of the premium.
  • Increase the employee's taxable wages to provide funds that the employee may use to pay for individual insurance policies. However, the employer cannot require that the funds be used to pay for insurance-it must be the employee's decision to do so (or not). The employer can claim a deduction for the wages paid. The wages are taxable to the employee, but the employee can claim the premiums as an itemized deduction subject to the 10%-of-AGI limit (7.5% if age 65 or older).
The Affordable Care Act can be confusing and overwhelming if you aren't prepared. Soukup, Bush & Associates is always here to assist you in making the best decisions for your company and your employees. Please feel free to contact us with any questions you may have regarding the above information, or if there is another way we can serve you.
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