Employers That Reimburse Employees' Individual Insurance Premiums Could Be Subject to Serious Penalties

An employer that directly reimburses employees on a pre-tax basis for premiums paid by an employee for non-employer sponsored health insurance, including coverage purchased from Covered CA, risks significant penalties. The IRS considers this type of payment arrangement an "employer payment plan" under IRS Notice 2013-54. A recent IRS FAQ emphasizes that such employer payment plans are considered group health plans under the ACA, and are therefore subject to ACA market reforms. However, because of the way these payment plans are structured, they cannot comply with the ACA's market reforms (e.g. the prohibition on annual limits for essential health benefits and requirement to provide certain preventive care without cost sharing). Employers who violate these requirements are subject to a $100/day ($36,500/year) excise tax per applicable employee.

To avoid this tax penalty, employers may wish to establish a payroll practice of forwarding post-tax employee wages to a health insurance issuer at the direction of the employee, rather than reimbursing employees directly for outside health coverage on a pre-tax basis. Employers who opt to pay employee's outside health insurance on a post-tax basis still must comply with certain DOL regulations. (see 29 CFR 2510.3-1(j)).

See the IRS FAQ at http://www.irs.gov/uac/Newsroom/Employer-Health-Care-Arrangements.