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Small Business Employee Benefits and HR Blog

New Penalties Start Today for Reimbursing Employees the Wrong Way

July 1, 2015
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Employer payment plan penalties start today

Under the Affordable Care Act there are new rules for reimbursing employees for individual health insurance. And as of today, employers using an Employer Payment Plan or non-compliant reimbursement plan face penalties of up to $100 per day per employee.

The penalties are steep; up to $36,500 per employee annually. What is not being talked about, however, is there is a compliant way to go about health insurance reimbursement. This article provides a summary of the new penalties starting today and how an employer can avoid the fees.

What are the New Rules?

To understand the penalties, it is important to understand the new rules. Here is a brief summary.

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 the Market Reforms are still able to reimburse individual health insurance premiums tax-free; nothing in the tax code has changed that allows this.

There are, however, several types of plans and arrangements that do not meet these new requirements.

Who Will be Penalized?

If the business is helping employees with their health insurance costs in one of the follow ways, the new penalties may apply:

  • Offering a stand-alone Health Reimbursement Arrangement (HRA), with two or more participants

  • Paying for employees’ health insurance directly to the carrier

  • Reimbursing employees directly for health insurance without a formal, compliant plan

  • Offering a reimbursement plan that does not meet the Market Reform requirements

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).

Wondering if you are reimbursing employees correctly now? See this PDF flowchart to find out.

How Can We Avoid the Penalty?

Employers can reimburse employees for individual health insurance - and avoid costly penalties - by using a formal, compliant reimbursement plan.

Just remember - the reimbursement plan needs to comply with the Affordable Care Act’s Market Reforms, as well as other applicable federal regulations (ERISA, HIPAA, IRS, etc.). Types of reimbursement plans that generally comply with the Market Reforms include:

As an alternative to a formal 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.

Conclusion

Penalties for non-compliant reimbursement arrangements, such as an Employer Payment Plan, start today. Employers can avoid the fees, and continue to reimburse employees for individual health insurance, by adopting a formal Section 105 reimbursement plan (such as ZaneHealth) that complies with the ACA’s Market Reforms.

What questions do you have about the new Employer Payment Plan penalties, or about to how reimburse employees for individual health insurance? Leave a question below.

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