Bad news for firms that reimburse workers tax free for health insurance

Employers could owe a $100 per day penalty according to the IRS. 

The IRS just issued guidance on the tax treatment of employers who give tax-free money to their employees to help pay for insurance purchased through health insurance exchanges like the Mass. Health Connector.  These employers will be in violation of the Affordable Care Act (ACA) and subject to tax penalties that could be as much as $100 a day or $36,500 a year, per employee. This ruling effectively prevents employers from shifting costs to the government by “dumping” employees into the new health exchanges rather than providing workers with health coverage, as mandated by the ACA.

This new ruling eliminates many arrangements that employers have made in the past with workers to reimburse them for health insurance premiums and out-of-pocket costs. According to the IRS, when an employer reimburses employees for premiums, the arrangement, known as an employer payment plan, is subjected to taxes.

Right now, the IRS has not indicated how strict it will be in levying the penalty.  If the premium reimbursement is done on an after-tax basis, that arrangement generally is not subject to the excise tax. 

The federal government has already postponed until 2015 enforcement of the employer mandate, which requires employers with 50 or more full-time employees to provide insurance for full-time employees until 2015. Failure to comply carries a penalty of up to $3,000 per employee. The $100-a-day tax is separate from that fee, and will be assessed on employers who fail to provide plans that meet ACA standards.