We often get questions from employers about paying for an employee’s individual health plan with pre-tax money. The IRS recently clarified the rules regarding the ACA and IRS regulations surrounding employers reimbursing employees, on a pre-tax basis for individual health coverage obtained inside or outside the Marketplace.
Some health insurance brokers and agents have been promoting pre-tax premium reimbursement arrangements for individual plans obtained by employees. We want to warn companies that these plans have several pitfalls.
First, employers with 50 or more employees are required to buy group health coverage for their employers or face a penalty. This type of arrangement does not satisfy the ACA requirement and therefore companies choosing to go this route would still be subject to the tax penalty.
Second, and probably most importantly, these plans violate IRS regulations because they pay for individual health plan premiums using pre-tax dollars. There is no arrangement that allows an employer to pay for an employee’s individual health plan (inside or outside the Exchange) with pre-tax money. Employers of any size, who go this route could find themselves subject to costly IRS penalties.
That being said, an employer could increase an employee’s wages, which are taxable, to compensate for an employee paying for their own individual health plan.
This article goes into more detail about the IRS and ACA restrictions on pre-tax payment plans.
If you have questions about the ACA or IRS regulations surrounding employer contributions to employee health plans, please contact member of our Account Management Team.