Small Employer Health Insurance Payment or Reimbursement Plans May Violate Affordable Care Act

The IRS has issued two important notices concerning small employers* (fewer than fifty full time equivalent employees, or FTEs) and the reimbursement or direct payment of health costs or health insurance.

IRS Notice 2013-54 and IRS Notice 2015-17 clarify the IRS position that small employers may no longer reimburse employees for health plan premiums, and may no longer direct pay premiums that are for health insurance that is not part of a qualified group plan. For example, a situation which may violate the new IRS regulations is an employer that does not offer health insurance to employees. Instead, the employer offers reimbursement up to a specific dollar amount for the employee to use against their own health insurance expenses. Employees find and purchase individual health insurance on their own, and then get reimbursed from the employer for the premiums.

If you do not know if your health plan is a qualified group plan, you should check with your benefits specialist or consultant.** It is very important that you clarify your status. The penalties for employers who violate these IRS regulations are significant (violating employers may be subject to a $100/day excise tax per applicable employee, which is $36,500 per year, per employee, under § 4980D of the Internal Revenue Code). Although there is some ambiguity on whether the IRS § 4980D excise tax would apply to a local governmental unit (e.g., a city, village or town), it appears that it is possible that the excise tax would be applicable to local governments by implication of the Public Health Service Act, which does apply to local governments.

There is currently a grace period where no penalties apply. But that grace period ends on June 30, 2015. So beginning in July, if you are reimbursing or direct paying for your employees’ health insurance which is not part of a qualified group plan, you may face significant penalties from the IRS.

IRS Notice 2015-17 also clarified that employers who must stop paying or reimbursing health insurance premiums, but who wish to compensate their employees who will lose this reimbursement, can give their employees a raise to make up for any loss, but must not condition that raise in any way on requiring the employee to purchase health insurance.

Links to the IRS Notices can be found on the IRS Website at: http://www.irs.gov/Affordable-Care-Act/Employer-Health-Care-Arrangements.

*Note: this article does not apply to employers having more than 50 full time equivalent employees. It also does not apply to employers who offer their employees a qualified group plan for health insurance. For guidance on calculating your FTEs, see the IRS website at the following page: http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-Questions-and-Answers:-Determining-FTEs-and-Average-Annual-Wages.

**If you do not have a benefits consultant and you are uncertain if these provisions apply, you may need to consult with one. Our law firm uses J.A. Counter & Associates, Inc., 1477 S. Knowles Avenue, New Richmond, Wisconsin, (715) 246-3811, http://jacounter.com/.

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