If you were hoping to save money on healthcare costs by sending your employees to the exchanges and helping them with premiums through tax-free contributions, think again. Thanks to recent IRS guidance on an IRS ruling made last year, you’ll have to come up with a Plan B.
The employer mandate of the Affordable Care Act (ACA) requires larger employers to offer health insurance coverage to their full-time workers or be subject to penalties. But after running the numbers, many employers decided it would cost less to give each employee a pre-tax sum of money to cover health insurance purchased individually rather than provide group coverage directly.
These arrangements are certainly nothing new. Employers have been helping out their employees by reimbursing them for health insurance premiums and out-of-pocket expenses for decades. But this new federal ruling is a game changer.
On May 13, 2014, the IRS issued Q&A’s summarizing IRS Notice 2013-54, issued last September 13. The new guidance clarifies that an employer payment plan is considered a group health plan, and it doesn’t meet the requirements of the ACA. But, as the notice states, "An employer payment plan, as the term is used in this notice, generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation."
For employers who provide coverage, their contributions average more than $5,000 a year per employee and aren’t counted as taxable income to the employees. But the IRS says employers can’t meet their obligations under the healthcare law just by reimbursing employees for premium costs.
Bottom line: If you use an “employer payment plan,” you could be in for a costly surprise at tax time.
According to the IRS, you could be hit with an excise tax of $100 a day – up to $36,500 per year – for each applicable employee. You do the math. If you’re a larger business, you could be looking at a tax bill in the millions. And keep in mind, that’s on top of the potential $3,000 per employee penalty you’ll pay for failing to comply with the employer mandate once it goes into effect in 2015.
Do you have options?
Actually, there’s nothing stopping you from canceling your company plan and leaving your workers to buy individual policies sold through the exchanges — as long as you’re willing to pay the taxes and penalties. Or, you can raise salaries and tell your employees to buy health insurance through the exchange with the extra money. But keep in mind, that extra compensation is taxable on both ends, and the worker may see it as a reduction in their benefits and cry foul.
Clearly, the federal government wants employers to continue providing coverage to workers and their families, and they’re pushing hard to keep employers in the group insurance market and reduce the incentives for them to drop coverage. And with the recent crackdown by the IRS, employers need to be aware that if they’re engaging in what is considered an employer payment plan, they’ll probably raise some red flags when tax time rolls around.
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