IRS Bans Pre-Tax Reimbursement of Individual Health Insurance Premiums
Due to skyrocketing cost of group health insurance, many employers have opted to drop group coverage altogether and instead reimburse their employees for all or part of their individual health insurance premiums on a pre-tax basis. Under these arrangements, the employee did not pick up the amount of the reimbursement as taxable income, but the employer did take a tax deduction equal to the reimbursement. Most commonly, employers accomplished this pre-tax reimbursement of individual health insurance premiums through a type of cafeteria plan known as a premium-only plan (POP), a health reimbursement account plan (HRA), or a medical expense reimbursement plan (MERP).
Unfortunately, effective January 1, 2014, pre-tax reimbursement of individual health insurance premiums is banned under Health Care Reform, regardless of whether the reimbursement is made under a POP, an HRA, a MERP, or any other arrangement. In order to put teeth into the ban, on May 13, 2014 the IRS issued FAQs stating that the pre-tax reimbursement arrangements described above would be subject to the Health Care Reform violation excise tax, which is equal to $100 per day per employee. For example, a dentist who reimburses four of her employees on a pre-tax basis for their individual health insurance premiums for all of 2014 would be subject to an excise tax equal to $146,000 for the year ($100 x 4 x 365 = $146,000).
Note that Health Care Reform does not prohibit an employer from increasing an employee’s overall cash compensation to take into account the fact that the employer doesn’t provide group coverage and the employee has to pay for individual health insurance coverage on their own. In addition, when an employer does offer group coverage, the employer can still deduct the portion of group premiums that the employer pays, and can also allow employees to pay the balance of the premiums on a pre-tax basis. Please contact our Employee Benefits group if you have any questions regarding reimbursing employees for health insurance premiums.