Premium reimbursement is a costly ACA violation
Posted On: 6-4-2015 | Posted By: Debbie Mathes, CPA
As of July 1, employers that reimburse employees for the cost of health insurance premiums obtained on the individual market will be subject to an excise tax of up to $100 per day ($36,500 per year) for each affected employee.
As previously shared with you, the Internal Revenue Service, Department of Labor and Department of Health and Human Services have each stated that employer payment plans, also known as premium reimbursement plans, for individual health insurance coverage fail to comply with the Affordable Care Act.
What is a premium reimbursement plan?
An employer payment plan is an arrangement in which an employer reimburses employees or pays directly for all or part of the premium for individual coverage. Because these plans do not comply with the new requirements of the ACA, an employer no longer can reimburse employees for the purchase of an individual market policy, regardless of whether the employer treats the payment as a tax-free benefit or as additional taxable wages to the employee.
Example: Company TwoFro has seven employees and reimburses each employee for the cost of his or her individual health insurance premium. Beginning July 1, 2015, the continuation of this insurance policy exposes Company TwoFro to a $255,500 annual excise tax ($35,500 for each of the seven employees), regardless of whether the reimbursement to the employees is with pre-tax or after-tax dollars.
Earlier this year, in Notice 2015-17, the IRS provided transition relief to small employers from this $100-per-day excise tax. The IRS recognized that many small employers provide health insurance by paying directly or reimbursing the cost of premiums for individual policies, and outlined the following relief:
Small employers with fewer than 50 full-time employees will not be subject to the penalty for 2014 or the period January 1, 2015, through June 30, 2015.
If I currently offer my employees a premium reimbursement plan, what can I do?
Possible remedies to your prior premium reimbursement practices include increasing your employees’ compensation. Employers have the right to provide compensation increases intended to pay for the employee’s cost of insurance coverage; however, you cannot require the employee to use the increase to purchase such health insurance coverage. In order to meet ACA requirements you must allow the employees discretion in how they use the additional compensation.
In addition, the extra compensation will now be subject to both income and payroll taxes, whereas, previously, the employer did not have to pay payroll taxes on the insurance reimbursement payments. If you convert to the additional compensation method for insurance reimbursement, you will be paying the employer share of FICA (subject to the overall annual wage limit) and Medicare taxes.
If, in the past, you were paying the employee’s individual health insurance premiums direct to the applicable insurance carrier, you can continue to forward those payments. However, the payments are now considered post-tax employee wages and you will need to include them in the taxable wages so applicable taxes can be withheld and paid in correctly.
The transition relief does not apply to employers with more than 50 full-time employees, so these “large employers” who are in violation are required to file Form 8928 and report the excise tax.
Violating these regulations can be costly, so contact your WK advisor if you have any questions about employer requirements under the ACA.