IRS Issues Warning About Health Care Premium Reimbursements
As employers are well aware, the fall-out from the Affordable Care Act (ACA) has been widespread. As employers struggle to continue to provide meaningful benefits to their employees, there are multiple pitfalls they must avoid so as not to run contrary to the law.
Last fall, three agencies – U.S. Treasury, Department of Labor, and Health and Human Services – attempted to provide guidance with respect to employers who sought to drop group coverage in exchange for individual policies. Bulletins issued included discussion of the use of health reimbursement arrangements, premium reimbursement arrangements, and other employer payment plans (IRS Notice 2013-54 and DOL Technical Release 2013-03). Since the passage of the ACA and the imposition of the employer mandate (formerly 2014, now extended to 2015), many employers were weighing their options and ended up dropping group coverage and then providing their employees with cash to offset the cost of individual policy premiums. In some cases, individual policies could be purchased on a public exchange (if the state had established one), and in other instances the policies would be purchased on a private exchange or individual market.
However, employers beware. While it should be a fairly obvious tax trap, it apparently has been escaping the notice of some employers, and since the fall, the IRS has followed up on this earlier guidance with a warning that providing reimbursements on a pre-tax basis risks costly penalties, up to $36,500 per individual per year.
These “employer payment plans” involve reimbursing employees for health insurance premiums by paying the employee based on receipts for premiums or even by paying the premiums to the insurance company directly. Employers have been excluding these reimbursements from employee income. However, be forewarned that the IRS has now unequivocally spoken and said that these reimbursements must be taxable income to avoid ACA penalties.
Employers can, however, utilize employer payment plans so long as the employee’s choice is between after-tax reimbursements or cash which results in taxable income to the employee equal to the reimbursement amounts.
We strongly encourage you to review your health plans in general and consult with a tax professional, and if you maintain an employer payment plan, amounts reimbursed should be properly reported as taxable income.
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