In past years, instead of or in addition to offering a group health plan, many employers agreed to reimburse their employee’s health insurance premiums (usually up to a pre-determined limit) if the employee obtained an individual policy of her own.
Among the many changes brought about by the Affordable Care Act, however, were new requirements that essentially make this type of arrangement impossible to offer to employees without violating the statute and incurring very onerous penalties.
If there was any doubt about whether employers could continue to offer these so-called employer payment plans, the IRS has made it abundantly clear: employers can no longer reimburse employees for the cost of premiums for health insurance purchased on the individual market. 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, such as for employer payment plans with fewer than two active employees (e.g., retiree-only plans).
Employers who continue to offer these types of employer payment plans may be liable for excise taxes under 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 limited transition 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. No transition relief was provided to employers that are ALEs.
IRS Notice 2015-17 provides guidance on the transition relief and is available here.