Employer Payment Arrangements
Under employer payment arrangements, the employer reimburses employees for premiums they pay on their individual health insurance policies (or the employer sometimes pays the premium on behalf of the employee). As long as the employer (1) makes the reimbursement under a medical reimbursement plan and (2) verifies that the reimbursement was spent only for insurance coverage, the premium reimbursement is excludable from the employee's income. 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.
Unfortunately, according to the IRS and Department of Labor (DOL), group health plans can't be integrated with individual market policies to meet the new market reform provisions. Furthermore, according to the DOL, an employer that reimburses employees for the individual policies (on a pretax or after-tax basis) has established a group health plan because the arrangement's purpose is to provide medical care to its employees. Therefore, reimbursing employees' for premiums paid on individual policies violates the market reform provisions, potentially subjecting the employer to a $100 per day per employee ($36,500 per year per employee) penalty.
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.
Bottom Line - While still technically allowed under the tax code, employer payment arrangements, other than arrangements covering only one employee, are no longer a viable alternative.