For years, small businesses who did not offer health insurance would often reimburse employees for individual plan premiums, which were often known as non-taxable benefits. Any small business under 50 employees may no longer reimburse employees for medical costs or individual insurance plan premiums. For those who continue to do so, a hefty fine awaits you.
Many smaller employers (under 50 full-time equivalent employees) adopted this type of arrangement to help their employees cover insurance costs before the Affordable Care Act (ACA). Employers found it less expensive, and it had fewer administrative burdens versus offering a group health insurance plan.
Since July 1, 2015, this strategy is no longer a viable option for small businesses and those who continue to reimburse employers should be aware of potential fees that could be sent their way.
Am I affected?
You will be fined if your company meets the following criteria:
- Has under 50 employees
- Reimburses 2 or more employees for individual health insurance policies in place of group health insurance.
Employer Penalties for Reimbursement
Employers can no longer pay premiums for individual health policies or reimburse employees for individual premiums on either a pre-tax or post-tax basis (the payment or reimbursement of group health insurance premiums is still allowed). This applies to any form of payment or reimbursement regardless if it is through a Section 125 plan, a Section 105 plan, or another vehicle.
Employers are subject to a $100 per day ($36,500 per year) per employee penalty if they reimburse or pay any portion of individual health coverage premiums on either a pre-tax or post-tax basis. Under the ACA rules this reimbursement creates a non compliant group health plan.
Currently, a small employer (50 or fewer equivalent full-time employees) has no legal obligation to provide health insurance plans for its employees. But those altruistic small employers who want to help employees by reimbursing them for the cost of individual health insurance can get hit with an up to $36,500 per-applicable-employee annual penalty. Contrast that to the large employer (50 plus FT employees) annual penalty of $2,000 per employee for those employers not offering any health insurance coverage.
Taxable Wages to Offset Cost
Employers who do not offer group health insurance can still increase an employee's taxable wages to offset the cost of individual health coverage, but they cannot then require the employee to purchase health insurance or certify they have coverage to receive the increased taxable wage (or bonus). If the employee wage increase or bonus is specifically designated as a premium reimbursement or if it must be used for premiums, this is considered an impermissible employer payment plan and subjects that employer to the penalty.
Other ACA Fees
In addition to penalties for non-compliance with employer shared responsibility rules, the ACA has a multitude of new fees that employers must pay that change annually. Also, employers who offer opt-out payments to employees who elect to waive coverage must meet certain requirements to remain compliant and avoid penalties.
What Can I Do?
Although there are a few ways that we mentioned where employers can get fined for reimbursing employees for health insurance, there is a solution. HRA’s, or a health reimbursement arrangement allows employers to reimburse employees for health insurance without the fines and fees that were previously mentioned. One can do so on a tax free basis for pre qualified medical expenses.
In this system an employer would come up with a plan with parameters the employees stay within, the employees would purchase their insurance and pay medical fees, and then the employer would reimburse their employee up to the parameters that were set. As an employer you can choose from a few different HRA plans: QSEHRA (qualified small employer), ICHRA (individual coverage), or EBHRA (expected benefit).
To see more about HRA’s see our article on New Health Options Available Involving HRAs.