Thanks to the Affordable Care Act (ACA), individual health insurance is more affordable than ever. In fact many small and medium sized employers are switching to a premium reimbursement solution to reimburse individual health insurance as an alternative to group health insurance. Employers may be able to offer a better and more affordable healthcare benefit by allowing their employees to have access to all of the advantages individual insurance has to offer, including premium tax credits.
It is vital that employers who implement premium reimbursement plans are aware of compliance considerations regarding tax-free reimbursements of health insurance premiums. That is why most employers who administer these plans use a compliance premium reimbursement software provider to ensure that they and their employees are remaining in compliance. While some in the industry argue that it is not possible to reimburse individual health insurance if an employee has received a premium tax credit, this article clarifies how to remain in compliance while doing so.
How Employees Can Access Premium Tax Credits
As part of the ACA, the federal government provides premium tax credits to help many people buy more affordable individual health insurance coverage through the Health Insurance Marketplaces. The health insurance tax credits are "advanced-payable" meaning they can be applied toward employees’ premiums when they purchase health insurance coverage.
Employees can only access the premium tax credits if they purchase an insurance policy from the Marketplace. The tax credits are available to households with income up to 400% of the federal poverty line (FPL). As the following chart shows, this means households earning up to $46,680 for an individual in 2014, or $95,400 for a family of four, qualify.
Chart: Affordable Care Act 101
The premium tax credits act as a cap on how much employees will pay for health insurance. The insurance premium is capped on a sliding scale between two percent and 9.6 percent of their income. For example, as the chart above shows, if an employee makes $23,340 a year (200 percent FPL), the maximum amount they will pay for health insurance is 6.34 percent of their income which is $1,480/year ($123/month).
Reimbursing Employees’ Individual Health Insurance Premiums
With a premium reimbursement plan, employers reimburse employees tax-free for individual health insurance policies. Employers fix their costs on a monthly basis, and employees can choose a health insurance policy that best meets their health and financial needs. Using premium reimbursement software helps employers with the administrative tasks of the premium reimbursement plan and ensures compliance.
Some individuals argue that employer reimbursement of individual insurance using a premium reimbursement plan is not possible if the employee is receiving an advanced premium tax credit.
With a credible reimbursement software provider, however, employers can reimburse their employees for individual health insurance premiums with confidence that they are remaining in compliance with the regulations regarding the tax-free reimbursements of health insurance premiums.
It is vital to select a credible premium reimbursement software provider to validate each reimbursement. The responsibility of the software provider is to make sure that the employees are only receiving reimbursements for valid health insurance premiums.
The software provider should also review each premium payment receipt to verify whether the employe has received a premium tax credit. By requiring employees to provide proof of exactly what they pay out of pocket for their health insurance, the employee will only receive reimbursement for the non-subsidized portion of their premium.
The premium reimbursement software provider should also require valid documentation that is saved on file for ten years to verify that each reimbursement was for an IRS-qualified health insurance policy. The documentation should be kept on file in the case of an IRS audit to protect the employer and employees.
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