Can I Reimburse My Employees’ Individual Healthcare Premiums?

No, you cannot. In a clarifying document released by the Department of Labor, it was noted that both pre-tax and post-tax reimbursements for individual purchases are in violation of the law, and companies who attempt to get health coverage for their employees in this way could trigger penalties.

How Did This Get Started?

Since the implementation of the Affordable Care Act, many small businesses have been looking for ways to avoid providing expensive group health benefits.

Some business owners have had the idea of providing reimbursements for employees to purchase individual plans. In short, individuals would be responsible for choosing their health plans – and doing the paperwork – while the business would simply reimburse them for what they paid in premiums.

The official response from the IRS has not been favorable.

What Happens If A Company Pays Non-Taxable Reimbursements And Gets Caught?

According to IRS Notice 2013-54, these arrangements would be considered employer payment plans. As such, they would be defined as group health plans subject to the market reforms, which cannot be aligned with individual plans.

Since premium reimbursements don’t satisfy the market reforms, businesses would be subject to a tax of up to $100 per-day per employee, per section 4980D of the Internal Revenue Code. That means penalties could add up to $36,500 per employee per year!

One Possible Solution

One possible way of circumventing this plan is offering raises to employees, but avoiding any and all appearances of a group plan. This means:

  • The company cannot ask employees what they are spending the additional money on.
  • In addition, the company cannot ask what plan an employee has, or even how much the plan costs.

The goal of this solution is to avoid any appearance that the company is providing the raise as reimbursement for health care costs. Unfortunately, this makes compliance with the plan extremely difficult – without a way of checking on employees’ insurance status, it’s impossible to verify whether or not the money is being used as you’d like.

Accordingly, this solution is only practical when used with employees you trust to do the right thing. While you cannot ask them about their health care plans, you can remind them of the benefits of coverage, as well as the individual fee they’ll have to pay if they’re out of compliance.

So, What Should I Actually Do?

Think about the personalities of your employees and crunch the numbers. It may be more affordable to keep employees enrolled in a traditional company plan, and a lot of options depends on the choices available from insurance providers in your area.

Finally, remember that future legislation could change the regulatory landscape. Don’t be afraid to talk to regulators or a legal adviser if you have further questions about reducing your costs while remaining compliant with the law. Consider revisiting this issue annually to be sure you’re still getting the best value for your money.