Employer’s Paying for Individual Insurance

Employers ditching their group policies and forcing employees to shop the state-based and federally facilitated exchanges, has been a big concern with the Obamacare rollout, especially in low-wage jobs where people are most likely to be eligible for subsidies. And, indeed, it has been happening. Some employers have even paid employees to shop for health insurance on their own.

Prohibited

The IRS prohibits employers from giving (or reimbursing) employees pre-tax funds to buy health insurance on their own—through the state-based and federally facilitated exchanges or private marketplaces alike.1 This practice may result in a $100 per day excise tax per applicable employee, according to an IRS Q&A released in May 2014.2

If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer’s payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments’ prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.

There has been a lot of misinformation swirling about this practice. Dave Keller, Chief Marketing Officer of IHC Specialty Benefits, warns that some companies continue to advise employers that it is okay and they can help them get around or deal with the IRS.

Allowable
Nothing prevents employers from paying employees extra taxable income to buy health insurance. Of course, they have no control over whether or not employees actually use this money to purchase health insurance coverage.

Giving employees extra taxable compensation to purchase health insurance has its pros and cons.

On the plus side:

  • Employees receive extra money each month, which may be used to pay his or her health insurance premium
  • If the employee’s income is 100 to 400 percent of the federal poverty level, he or she may qualify for a premium tax credit if exchange-based coverage is purchased—and possibly cost-sharing subsidies if his or her income is up to 250 percent of federal poverty and he or she purchases a silver plan
  • Employees get to pick a health insurance plan that best fits his or her needs rather than receiving the limited options an employer selects

As far as cons go, there are two key things to consider:

  • Extra funds given to employees for use on health insurance premiums is taxable income, which means if someone is on the cusp of subsidy eligibility, the extra money could push their income over the threshold and mean they no longer qualify for financial assistance.
  • There are tax consequences. Again, the extra money given to employees is taxable as opposed to a typical group insurance arrangement in which health insurance premiums are paid pre-tax.

 

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