In response to interest from employers in helping employees pay for individual health insurance policies, the Departments of Labor (DOL), Health and Human Service (HHS) and the Treasury (Departments) issued FAQ guidance on Nov. 6, 2014, clarifying that these arrangements do not comply with the ACA’s market reforms and subject an employer to penalties. Although it was widely believed that these penalties would apply only to pre-tax arrangements, the FAQs clarify that after-tax reimbursements and cash compensation for individual premiums also do not comply with the ACA’s market reforms and may trigger the excise tax penalties.
This guidance essentially prohibits all employer arrangements that reimburse employees for individual premiums, whether the employer treats the money as pre-tax or post-tax to the employee. The FAQs also clarify that Code Section 105 reimbursement plans that are established to help employees purchase individual policies are also not permitted. Because these employer health care arrangements do not comply with the ACA’s market reforms, the IRS indicated that these arrangements may trigger an excise tax of $100 per day for each applicable employee ($36,500 per year per employee) under Code Section 4980D.