16 Jun Penalties for Pre-tax Contributions to Employee Individual Health Premiums

Penalties for Pre-tax Contributions to Employee Individual Health Premiums

On May 13, 2014, the Internal Revenue Service (IRS) issued FAQs addressing the consequences for employers that provide employer payment plans. The IRS clarified that these arrangements do not comply with the Affordable Care Act’s (ACA) market reforms and are subject to an excise tax.

Employer payment plans are arrangements in which employers reimburse employees on a pre-tax basis for individual health insurance premiums, whether inside or outside of an Exchange. Some employers have considered doing this to help employees pay for individual health insurance policies instead of offering an employer-sponsored health plan.

However, under IRS Notice 2013-54, these premium payment arrangements are considered employer payment plans, a type of group health plan subject to the ACA’s reforms. Because employer payment plans do not comply with the ACA’s regulations, the IRS indicated in the FAQs that these arrangements may be subject to an excise tax of $100 per day for each applicable employee ($36,500 per year per employee) under Code Section 4980D.

An employer payment plan generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage, or in which the employee may take that amount in cash compensation. Thus, premium reimbursement arrangements made on an after-tax basis will still be permitted.

 

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