Health insurance has long been a benefit that large businesses have offered to recruit top talent. Small businesses have sought to do the same in an effort to remain competitive. But as premiums continue to rise over the years and benefits continue to shrink on more “traditional” group health insurance policies, offering this benefit is increasingly out of reach for many small businesses, and today only about half of all small- and medium-sized businesses are able to do so.
Many small business owners are moving toward a Health Reimbursement Plan to solve this problem and remain competitive. With this type of group health plan, employees shop the individual marketplace for policies and then receive a reimbursement from their employer to help cover premiums. But there has been some confusion among employers about whether these plans are IRS compliant, begging the question, “Can Small Businesses Reimburse Employee Insurance Premiums?” Let's clarify.
The July 2015 IRS Regulation
In July 2015 the IRS announced a new regulation that would impose a penalty on Employee Reimbursement Plans of up to $100 per employee, per day (up to $36,500 per employee). It’s a steep penalty, especially when compared with the $2,000-per-employee penalty for not offering any health insurance. It’s also a significant disincentive and a huge blow to many small business employers whose only financially feasible option for health coverage is this type of assistance.
Health Reimbursement Plans Are Compliant
Fortunately, if set up properly, Health Reimbursement Plans (HRPs) are compliant, thus providing small business owners a less expensive health insurance solution that meets and exceeds employee expectations. HRPs fall under these areas of the Internal Revenue Code and are most commonly referred to as “Section 105” plans:
- Section 105
- Section 106
- Section 2013(d)
- Section 162
Why Section 105?
Section 105 plans are recommended because they comply with all the Obamacare Market Reforms for group health plans. They also comply with PHS Act 2711 and 2713, which set annual limits on reimbursements and identify requirements for preventive care, and other federal requirements like HIPAA, COBRA, ERISA, Medicare reporting, and IRS rules. Without the protection of a limited-purpose Section 105 medical reimbursement plan, you could find yourself in hot water for trying to pay directly for employees’ individual health plans. Thus remaining compliant is important, and simple once you are educated on the specific requirements you must follow to avoid a penalty.
Finding a way to provide employees with insurance is important for retention and recruitment at any business. Setting up the right kind of insurance structure for your business can help control costs and still allow your employees to get the coverage they want.
How is your small business planning to provide employee health insurance in 2016? Tell us in the comments below.