Paying Premiums for Individual Health Insurance Policies Prohibited
Due to the rising costs of health coverage, some employers have considered helping employees pay for individual health insurance policies instead of offering an employer-sponsored group health plan. In response, the Internal Revenue Service (IRS), Department of Labor (DOL) and Health and Human Services (HHS) (Departments) have been regularly issuing guidance addressing these arrangements.
Generally, the Departments’ guidance has provided that any employer arrangements that reimburse employees (or pay directly) for individual premiums are prohibited under the Affordable Care Act (ACA), whether employers treat the money as pre-tax or post-tax for employees.
According to the Departments, these arrangements are considered group health plans that cannot be integrated with individual market policies to satisfy the ACA’s market reforms. As a result, these plans will violate the ACA’s market reforms, which can trigger penalties, including excise taxes of $100 per day for each applicable employee ($36,500 per year, per employee) under Internal Revenue Code (Code) Section 4980D.
According to the IRS, employers that do not want to provide group health insurance coverage, but want to help their employees with the purchase of health coverage, can provide the employee additional compensation to do so, as long as the additional compensation is not restricted to the payment of medical expenses. The additional compensation would not be excluded from the employee’s income under Code Section 106, and would be reported with other income and wages on the Form W-2.
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