Can employers still reimburse employees for personal health insurance premiums? Yes. Will employers pay penalties if they go about it the wrong way? Yes.
Here’s a quick overview of what small businesses need to know about reimbursing employees for personal health insurance this year.
Is Health Insurance Reimbursement Still Allowed?
Yes. Employers can reimburse employees for personal health insurance - and avoid costly penalties - by using a formal, compliant reimbursement plan.
The key here is that the reimbursement plan complies with the Affordable Care Act’s Market Reforms, as well as other applicable federal regulations (ERISA, HIPAA, IRS, etc.). We’ll talk more about the Market Reforms next.
As an alternative to a reimbursement plan, employers may also offer employees a stipend (bonus or raise) to use on health insurance, but this must be treated as taxable income.
What are the ACA Market Reforms?
The Affordable Care Act (ACA) introduced new “Market Reforms” that apply to all group health plans, including certain medical reimbursement plans. The Market Reforms require that all group health plans:
Do not place an annual or lifetime limit on essential health benefits (PHS Act 2711), and
Cover basic preventive care without cost sharing (PHS Act 2713).
Reimbursement plans that comply with these Market Reforms are still able to reimburse personal health insurance premiums tax-free; nothing in the tax code has changed that allows this.
How Much are the Penalties, and When Do They Start?
If an employer uses a reimbursement arrangement that fails to comply with the Market Reforms, the employer may be subject to a $100/day excise tax per applicable employee (see IRC Section 4980D).
In February, the administration delayed penalties for Employer Payment Plans and noncompliant arrangements. The penalties now start July 1, 2015.
And remember, it is not just about the ACA Market Reforms. There are other rules and regulations under the IRS, ERISA, HIPAA, and in some cases COBRA. Employers must ensure compliance in these areas as well to avoid exposure to additional fees and penalties.
So, What Types of Plans are Okay to Use?
To summarize, types of reimbursement plans that generally comply with the Market Reforms include:
Section 105 Healthcare Reimbursement Plans (HRPs)
Stand-alone Health Reimbursement Arrangements (HRAs), with only one participant
Employers using these types of plans can reimburse employees’ health insurance premiums and avoid costly penalties.
Types of reimbursement plans that generally do not comply include:
Stand-alone Health Reimbursement Arrangements (HRAs), with two or more participants
Employer Payment Plans (an arrangement where an employer reimburses an employee directly for individual health insurance policies or directly pays for employees’ premiums)
Employers using these types of plans should adopt a compliant arrangement by June 30, 2015 to avoid costly penalties.
There has been a lot of buzz about the penalties for health insurance reimbursement, and rightfully so. Starting July 1, 2015, employers face penalties of up to $100/day per employee for having a noncompliant reimbursement arrangement. By adopting a compliant reimbursement plan or taxable stipend program, employers can help employees with the cost of their health insurance and avoid costly fees.
What questions do you have about health insurance reimbursement and the new penalties? Leave a comment and we’ll help answer them.