Last year, the IRS spelled out how it would treat employer contributions to employees to help them buy coverage on their own. More recently, it reiterated its position in Q&A format. The question the IRS posed to itself:
What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the marketplace or outside the marketplace)?
Employer Payment Plans
In answering its own question, the IRS characterized such arrangements as “employer payment plans.” These are different from health reimbursement accounts (HRA’s) and healthcare flexible spending accounts (FSA’s).
The IRS considers employer payment plans as group health plans, subject to the provisions of the Affordable Care Act (ACA), including the ban on annual limits for essential health benefits and the requirement for full coverage of preventive health services. But, even if employees bought coverage which featured those benefits, employer payment plans “cannot be integrated with individual policies to satisfy the market reforms,” according to the IRS.
The penalty for having an employer payment plan would make it prohibitively expensive. Specifically, employers could be subject to an excise tax as high as $100 per day per employee (that is, $36,500 per year per employee).
The IRS and the Department of Labor also take the position that an HRA cannot be integrated with “individual market coverage or with an employer plan which provides coverage through individual policies” without violating the ACA. However, HRA’s and healthcare FSA’s can still be used to help employees pay for “excepted” benefits, including vision, dental, accident, long-term care and automobile medical payment coverage.
Another form of health coverage, not subject to ACA requirements, which employers can help employees buy beginning in 2015 without being penalized is “wraparound coverage.” That’s basic health insurance to supplement a standard health plan which meets ACA requirements. This coverage cannot cost more than 15 percent of the cost of the basic health plan offered to your employees, however.
If you are still determined to get out from between your employees and their health plan coverage, you could avoid the “employer payment plan” penalties by simply giving employees a pay raise sufficient to subsidize their health benefits to the degree you want and can afford.
Keep in mind, however, you will be subject to higher payroll taxes, and since this income is taxable to employees, the amount of the raise they’ll have available to buy health coverage will be reduced by their added tax liability. Also, workers may eventually forget why they got the raise, and consider themselves employees of a company that doesn’t value its workers enough to offer health benefits.
Finally, if you are large enough to be subject to the ACA’s employer mandate, the salary increase tactic won’t allow you to avoid the penalty for not providing health coverage.