Due to the rising costs of health coverage, employers have shown interest in helping employees pay for individual health insurance policies instead of offering an employer sponsored plan. This arrangement is considered an “employer payment plan”. In response, the Departments of Labor (DOL), Health and Human Services (HHS) and the Treasury (Departments) issued FAQs clarifying that these arrangements do not comply with the ACA’s market reforms and may subject employers to penalties.

Although it was widely believed that these penalties would apply only to pre-tax arrangements, the FAQs clarify that after-tax reimbursements and cash compensation for individual premiums also do not comply with the ACA’s market reforms and may trigger the excise tax penalties. This guidance essentially prohibits all employer arrangements that reimburse employees for individual premiums, whether employers treat the money as pre-tax or post-tax for employees.

Although the ACA has not changed the tax treatment under Code Section 105 or 106, these arrangements violate the ACA’s prohibition on annual limits because they reimburse medical expenses up to a fixed amount. Notice 2013-54 clarified that these arrangements are considered group health plans subject to the ACA’s market reforms—including the annual limit prohibition and the preventive care coverage requirement—and cannot be integrated with individual policies to satisfy those requirements. As a result, effective for 2014 plan years, these plans are essentially prohibited. Because these employer payment plans do not comply with the ACA’s market reforms, the IRS indicated in the FAQs that these arrangements may trigger an excise tax of $100 per day for each applicable employee ($36,500 per year per employee) under Code Section 4980D.

It is important to note, increases in employee compensation do not constitute an employer payment plan as long as the increases are not conditioned on the purchase of individual health coverage.

Information is included in the below link to NEEBCo’s Healthcare Reform Bulletin. For the full Bulletin and additional information, contact your NEEBCo representative.

Employer Payment of Individual Premiums, page 1.