EMPLOYERS BE WARNED – THE IRS HAS PASSED VERDICT ON PAYING FOR INDIVIDUAL PLANS
This has been a great source of conflicting information at best and misinformation at worst.
The question is simple and the reason is easy to understand.
Can a company pay for an employee’s individual health plan?
We went as far as to ask legal guidance from benefit attorneys (yes, they exist) and even they hedge. Their answer, “We advise not to state definitively either way”.
Well the IRS and DOL are a great deal less shy and they’re pretty definitive.
Why does it matter and why is it even an issue?
First, the potential Stick
$100 penalty per employee per day. $36,000 per employee for the year.
According to their ruling, it even applies to small companies and to companies using Section 105’s. We’ll discuss in detail below.
Why does this matter?
It matters because roughly 20% of California companies are currently paying towards employee’s individual/family health plans.
That’s a big number. 20% of 100’s of thousands is…Material (to borrow our attorney’s phrasing).
You can always run your Employer health plan quote here:
Why Are Companies Doing This?
There are actually many reasons but the ACA law has vastly sped this approach since its inception.
Many employers (and employees) found out that they were being offered very large tax credit by Covered California based on income.
Great, jump off the group plan (or shut down the group plan with enough employees finding gold at Covered Ca) and go get subsidized coverage.
The employers reasoned that they can just contribute toward the employee’s individual plan and save (since it’s subsidized and has a smaller network – therefore less expensive).
Now, some employers actually have an agent looking out for them and were told that Federal and State law both do not allow this and at best, the contribution would not be tax deductible.
Many employers did not have such guidance or ignored it.
Some entities (we won’t name names) even wrapped up this practice in a veil of legal authenticity by putting the transaction through a Section 105 vehicle.
It’s a breed of HRA (Health Reimbursement Arrangement) that allows employers to deduct certain expenses they normally would not be able to.
In fact, these are still heavily marketed and according to the venders, have met legal scrutiny in terms of taxation and use.
Again, nothing like the IRS and DOL to ruin a party.
July 1st, They Officially Announced Their “Clarification”.
Employers that pay for individual/family health plans on behalf of the employees are immediately (July 2015) subject to a penalty:
$100 per employee per day that the arrangement occurs, up to $36,000/employee/year.
That’s not a misprint. It’s a disaster.
We knew it was official (as if the IRS guidance here isn’t official enough) when members of Congress went crazy over the rule and people began picketing in Washington.
Regardless of what you’ve been told, persuaded, or just wanted to believe…it’s very important that you remove your company from this liability.
Here are your options.
Stop funding the individual/family plans immediately.
You cannot increase an employee’s salary/pay “in lieu” of funding the health benefits.
This means you can’t say, “Hey, go get your own health insurance plan and I’ll increase your pay by $200/month to offset the cost”.
That’s exactly what a lot of employer do. It still puts you in jeopardy.
Some employers will respond back, “Well, how will they ever know??“
It’s no different than putting something untrue on your tax statement except now, there’s another person (your employee) involved who knows as well.
It doesn’t make sense to incur this sort of tax and legal liability.
What if that employee leaves on bad terms? Do you really want your companies financial safety to rest in a disgruntled employees hands?
Is it worth $36K per year?
You’re dealing with the IRS and DOL. They always win.
You essentially stop offering health benefits or remuneration for them to employees and they address their own individual needs. For some industries, that’s a different type of world.
We can quote Covered Ca for your employees if you want to go this route and make sure they are getting the best rates.
One note…for larger companies, they may have to pay a penalty for not offering health insurance starting in 2015 (already accruing). More information on the penalty for not offering coverage.
Okay, So What If You Want To Help Offer Benefits.
You can create a group health plan if you want to keep offering health benefits to your employees.
This is the only legal way to offer benefits if it’s important to attract and keep the right talent.
We can also quote group health options to find the best rate available to you and your employees.
The premium paid by the employer is 100% deductible and you out of the IRS’s crosshairs.
We can also run a complete proposal to show the cost/benefits between Group health plans and Individual/Family (including Covered California) although the latter cannot have employer funding.
This is the only way to make a good decision on which way to go.
The net take away is this.
If you, the employer, is paying towards individual/family coverage, you are taking a huge risk and regardless of what someone has told you, the IRS and DOL do not accept “I didn’t know” as an answer.
Why Doesnt The IRS And DOL Allow Employers To Pay For Individual Plans?
It’s simple. Double dipping.
They do not want individuals to get a tax credit from Covered California (dip #1) and then the employer to get a tax deduction for their payment (dip #2).
You could argue that until this penalty came out, worst case was that the funding just wasn’t going to be tax deductible to the employer.
Then again, why would any employer pay towards employee benefits if that funding was taxable.
Now with the penalty, it’s a no-brainer and a true no-brainer if an employer continues invite the potential jeopardy. $36K per employee can put most business out of business.
Not worth it.
You’ll start to see this make big front page news April of 2016 when the penalties come due.
Make sure it’s not you on the front page (for this reason, anyway).