ACA Review: Employers Prohibited from Paying Premiums for Individual Plans
By now you are probably overloaded with all the changes and deadlines that fall under the Affordable Care Act. As we muddle through all these rulings, there always seems to be a new regulation associated with it that we either did not know about or the information is vague. One that recently came to my attention was the fines businesses can incur if they reimburse employees for individual non-group health plans.
Employers Prohibited from Paying Premiums for Individual Plans
In the past, many employers have assisted their employees in paying for their individual health insurance policies instead of providing an employer-sponsored plan. Now, this practice is against the law. This regulation became effective July 1, 2015 and it primarily effects small businesses that get caught helping their employees buy individual insurance plans or pay their medical expenses. Under the new rule small employers who do not offer a group health plan, but give their workers additional pay to compensate for the purchase of individual health insurance or direct medical expenses can be fined $100 per day, per employee. This equates to $36,500 over a one-year period per employee up to $500,000. For larger employers the penalty is not as steep for failing to comply. They are only charged $2,000 per year.
Even though this rule applies to all employers, the fine itself only applies to those who have to comply with the Affordable Care Act mandate. This mandate has not been clear, but DOL and IRS have clarified the law that employers cannot reimburse employees for individual health plans as Health Reimbursement Arrangements (HRAs) or employer payment plans. The IRS issued clear details in its Notice 2015-17. Specifically, they emphasize that employer payment plans under the ACA are considered group health plans and would therefore fail to comply with the ACA’s market reforms.
So the question is, why can’t employers pay their employees for these individual health plans?
The bottom line is the ACA was written so employers have to offer group health plans or small employers can use the Marketplace. This rule was to prevent an employer from getting tax benefits via an HRA while at the same time the employee was using the subsidized Marketplace. This practice is better known as “double dipping.” The reason for the high fee is to prevent employers and employees from “double dipping” and getting around the mandate so the large excise tax was enacted for non-compliance.
The good news is there are some exemptions based on business size or not realizing you were not supposed to do this. Your business will generally not get a fee at first, but will get a warning and you will have 30 days to fix your practice of paying employees for their individual health plans.
The simple answer to avoiding this steep excise tax is for employers to offer their employees a group plan. An additional benefit of offering healthcare is your company will get the tax benefits under the ACA.