Reimbursing Employees for their Own Health Insurance? Watch Out…By: Jennifer Kobayashi

In order to better serve our readers, The Prinz Law Firm has invited experts in sales, business and leadership development, immigration, tax and accounting services, healthcare, and many other areas, to act as guest contributors on our blogs providing our readers with a broader range of content to help further your success.

This month we are featuring a post by Jennifer Kobayashi, a founding partner of a boutique employee benefits and executive compensation law firm. Jennifer advises employers on health care reform, retirement plan compliance, ERISA fiduciary responsibilities, and other benefits and compensation matters.

In past years, many small businesses have opted not to offer a group health plan for their employees. Some of these employers took another approach to health benefits: they reimbursed their employee’s health insurance premiums (usually up to a pre-determined limit) if the employee obtained an individual policy of her own.

If there was any doubt before, the IRS recently made it abundantly clear – employers can no longer reimburse employees for the cost of individual health plan premiums under these so-called “employer payment plans.” However, among the many changes brought about by the Affordable Care Act (also known as health care reform or Obamacare) were new requirements that essentially make this type of individual insurance reimbursement arrangement impossible to offer to employees without violating the statute and risking the possibility of incurring very significant penalties.

This is the case regardless of whether:

  • The reimbursement is made on a pre-tax or after-tax basis;
  • The employer also offers a group health plan that is compliant with the Affordable Care Act; or
  • The reimbursement is for an individual health plan obtained through a broker, through an insurance company, or through the Marketplace/Exchange.

There are only very limited exceptions, including employer payment plans with fewer than two active employees (e.g., retiree-only plans).

Employers who offered employer payment plans after 2013may be liable for excise taxesunder Section 4980D of the tax code. Because this rule has been the source of much confusion over the past several months, the IRS has provided a limitedtransition relief period for small businesses to come into compliance with the rules.

The transition period is available (1) for 2014 for employers that are not “applicable large employers” (ALEs) for 2014, and (2) for January 1 through June 30, 2015 for employers that are not ALEs for 2015.

ALEs are generally those employers who employ an average of at least 50 full-time equivalent employees during the calendar year.

If an employer qualifies for the relief, it will not be liable for the excise taxes that would otherwise apply under Section 4890D of the tax code. After June 30, 2015, such employers may be liable for the excise tax – which is a whopping $100 per day per employee who receives this type of payment or reimbursement for health insurance coverage.

Jennifer Kobayashi is a founding partner of Wang Kobayashi Austin, LLC, a boutique employee benefits and executive compensation law firm. Jennifer works with employers on a wide range of issues affecting qualified retirement plans (e.g., 401(k), 403(b), and defined benefit pension plans) including plan compliance and operations, ERISA fiduciary responsibilities, and DOL and IRS plan audits. She alsohelps employers navigate the many requirements ofhealth care reform and advises on non-qualified deferred compensation arrangements. In addition, Jennifer handles the employeebenefits and executive compensation aspects of corporate mergers and acquisitions, including due diligence, negotiating purchase/sale agreements, and benefit plan transition and integration issues.

For more information you can visit the firm’s website: or contact Jennifer at