Employer Health Insurance Reimbursements

Many small businesses not offering group health plans have reimbursed their employees for individual policies, or for coverage purchased on the recently formed Obamacare exchanges. Some companies have set up plans, while others have reimbursed their employees on a more informal basis. Recent guidance issued by the IRS has indicated that these arrangements are in violation of the Affordable Care Act and subject the        non-compliant business to hefty excise tax penalties.

And these penalties are significant, to say the least. Employers could be subject to a $100-a-day excise tax per employee. In their most recent guidance, the IRS hasn’t indicated how strict they will be in levying the penalty.

In these arrangements where employers reimbursed employees for the cost of their individual health insurance premiums, the employer often deducts these reimbursements as expenses, and the employees enjoy tax-free treatment of their premiums. Now the IRS is stating that the Affordable Care Act legislation explains that individual health coverage is not considered the same as a group health plan sponsored by the employer. In other words, the employer can no longer deduct these reimbursements as expenses.

The IRS has been pretty clear that there is no way around  this rule. So, it appears the only way a boss can help their employees with their individual health insurance premiums is to give them a pay raise. My experience is that most employers will not opt to do this because it will subject the company to additional payroll taxes and increase the receiving employee’s income taxes. It looks like another well intentioned benefit for both employer and employee has been negated by Obamacare.