Safe Harbor Ending for Employers Making Individual
Premium Payments; May Result in Tax Liability
The Internal Revenue Service, Department of Labor and Department of Health and Human Services have each issued frequently asked questions stating that employer payment plans (sometimes referred to as premium reimbursement plans) for individual health insurance coverage fail to comply with the Affordable Care Act. Employers that violate this rule are subject to an excise tax of up to $100 per day ($36,500 per year) for each affected employee.
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. These employer payment plans are considered to be group health plans that do not comply with the requirements of the ACA. An employer cannot 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.
From Blue Cross Blue Shield of South Carolina:
Please Note: The following information does not apply to list bill arrangements.
Several pieces of guidance and related documents have been released over the past two years regarding an employer’s ability
to pay for individual health policies through a cafeteria plan. These include 2015 guidance from the IRS; a 2014 FAQ from the U.S. Department of Treasury and the Department of Labor (DOL); and IRS Notice 2013-54.
Employers who have been in violation of this guidance are currently covered under safe harbor, but this will end June 30, 2015.
This deadline gives employers a short period of time to enroll their eligible employees in a compliant group health insurance plan.
Following these guidelines, BlueCross BlueShield of South Carolina cannot accept premium payments from third parties, except those allowed by CMS. This includes employer payments made on behalf of an employee.
The agency guidance includes major medical coverage that is subject to the Affordable Care Act (ACA). If employers provide any pre-tax funding of individual major medical coverage for active employees through a cafeteria plan, they are not in compliance with the ACA. The guidance states that an employer’s payment (or reimbursement) of individual major medical premiums for employees violates the ACA and may result in a $100 per employee per day excise tax.
This issue may seem confusing since the payment of individual major medical policy premiums is a permissible cafeteria plan
qualified benefit. Also, the provision of such coverage through the cafeteria plan continues to be exempt from income and
employment tax under the Internal Revenue Code. In addition, a cafeteria plan, in and of itself, is not a group health plan subject to the ACA. However, the guidance clearly states that any arrangement that pays or reimburses an employee’s individual major medical policy premiums on a pre-tax basis is an “employer payment plan,” which the guidance indicates is a “group health plan” subject to the ACA.
An employer may not reimburse an employee for any costs for an individual health policy (whether pre-tax or post-tax) or allow the employee to deduct the cost for their policy from a wage earned from the business. The penalty will apply regardless of whether the employer is reimbursing the employee directly or works through a third party administrator to provide an individual health policy on a pre-tax basis (such as with a list bill arrangement).
For more information, you may want to read the Employer Alert from the Employers Council on Flexible Compensation.
As always, please consult your tax advisor or attorney if you have questions.