Health Insurance Changes - Reimbursing Employees

The Department of Labor, Health and Human Services and the U.S. Treasury Department jointly released FACTS AND QUESTIONS effective November 6, 2014 that "explained that employers are prohibited from reimbursing employees on a pre-tax basis for premiums employees pay for individual health insurance policies. Any REIMBURSEMENT or DIRECT PAYMENT will now be included in taxable wage income for the employee."

The 5 exceptions to this rule ("Excepted Benefits") only apply if you have an Health Reimbursement Arrangement (HRA) and are as follows:

  1. HRAs are allowed to reimburse employee medical costs.
  2. HRAs may reimburse for dental, vision and long-term care costs.
  3. HRAs may be used when integrated with group health insurance.
  4. HRAs may be used to reimburse for indemnity and cancer policies
  5. HRAs may be used to reimburse retirees health care costs.

The penalties are rather stiff. "An employer who has implemented a tax advantaged arrangement (pre-tax) to compensate employees for individual plans may be subjected to an excise tax of $100 per day/per applicable employee (which is $36,500 per year, per employee)." There is a transition relief for this penalty, however, that has been extended thru December 31, 2016. Therefore, there will be no penalty for premium reimbursements by the employer for 2015 and 2016.

UPDATE
As of January 1, 2017, small employers with fewer than 50 full-time equivalent employees may use a Health Reimbursement Arrangement (HRA), reimburse employees for purchasing individual health insurance as if the employer were directly paying the premiums on a group health policy. This amount may be reimbursed on a pretax basis with no payroll taxes due from employer or employee. To take advantage of this change, however, some conditions must be met, including:

  • the company cannot offer a separate group health plan
  • the reimbursement must be made available on the same terms to all employees (although the amount can vary based on age and size of family)
  • reimbursement is limited to $4,950 for individuals and $10,000 for family plans (these amounts will be indexed for inflation).