As most of us have figured out, health care in the United States is undergoing very significant change. It has been fairly common for employers to reimburse individuals for health insurance purchased through COBRA or other sources. It is time for a full stop, or at least a good hard look at the practice.
IRS Notice 2015-17 prohibits employer reimbursement of individual health insurance, whether this reimbursement is on a pre- or post-tax basis. The consequences are pretty dire: a $100 per day penalty per infraction so if an employer pays for a year for individual coverage for two employees, those payments could give rise to a $73,000 non-deductible excise tax. Under FAQs published by the IRS, DOL and HHS, these reimbursements are considered group-sponsored health plans that do not comply with ACA.
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Enforcement for employers with fewer than 50 employees is delayed until July 1, but after that point, if the payment is a reimbursement (and not just a non-contingent increase in compensation), the excise tax clock starts. Additionally, under federal law, an employer is prohibited from providing employees with a financial incentive to elect a federal benefits program instead of the employer plan. It is also a violation of ERISA, HIPAA and ADA to provide incentives to sicker employees to get coverage under an individual plan.
Employers should be very cautious when developing strategies which can run afoul of these new rules. The penalties are severe.
Hasday is chief operating officer of Frenkel Benefits, LLC, one of the largest privately held independent employee benefits brokers in the United States. Reach him at firstname.lastname@example.org or (212) 488-0200, and read more from Hasday at frenkelyspeaking.com.
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