With the implementation of the Affordable Care Act, i.e. Obamacare, beginning January 1, 2014, new employer health coverage regulations take effect. Employers can no longer expense health care costs paid on behalf of employees, if the payments are not part of a qualified group health plan. This is to say that for employers, other than for a qualified group health plan (qualifying health insurance coverage) cannot pay employee health expenses on behalf of employees, and expense those payments in the business as an employee benefit.

Let’s say 555 LLC has 5 employees. 555 LLC contributes $200 to each employee per month in a separate check. The employee selects appropriate personal health coverage, e.g. health insurance, healthcare sharing ministry coverage, etc. If 555 LLC records an expense on its books as employee health benefits, it could be subject to a penalty of $100 per employee per day, up to $36,500 per year, after June 30, 2015. So for one year of noncompliance, the employer could have penalties assessed, exceeding $150,000.

Compliance with appropriate regulations is vital. Employers who prefer the defined contribution approach for employee health benefits will not be permitted to pay health coverage in this manner. The only coverage they can provide employees is a qualified group plan with the appropriate regulation guidelines in place, for compliant Affordable Care Act coverage.

Because the IRS realizes that many small employers have health reimbursement arrangements, and were to subject to these regulations January 1, 2014, they have provided some relief regulations in Notice 2015-17, issued in 2015, from the penalties as follows:

1. S Corporations reimbursing 2% shareholder employees (even if reimbursements are after tax) can transition out before December 31, 2015 without facing a penalty.

2. Employers paying coverage for employees for health care sharing ministries or personal health insurance coverage, can transition out of these plan before June 30, 2015 without penalty

3. Employers reimbursing Medicare premiums can transition out of these plans before June 30, 2015 without a penalty

 

Action item: if you included health reimbursement arrangements on employees 2014 W-2 at your tax accountant’s advice, you could consider amending those W-2’s and having the employees amend 1040’s to reduce the federal tax income, and receive a refund. They can be considered a nontaxable fringe benefit form 2014. This also reduces FICA taxes for you, the employer. The amendment costs will need assessed with the tax benefits. If the health reimbursement is less than $2,000 per employee, it’s probably not worth the amendment effort.

Should your business want to continue to pay employees for payment of health insurance or health benefits, regulation permits you to do this in the form of additional compensation; but you cannot condition the wage increase as payment for health coverage. You can simply give the employee a wage increase. The employee need full discretion on the use of that additional wage – such as payments for health coverage or vacation. Their are a few exceptions, but for the majority of employers, the fringe benefit now will be subject your business to the penalty.

Summary: The Affordable Care Act, i.e. Obamacare regulations is now disallowing health reimbursement arrangements for employees, with few exceptions. If your business pays health coverage or health benefits to employees, in any method other than a qualifying group plan, you need to immediately talk with your CPA. The risk after June 30, 2015 for your businesses is $100 per employee, per day. With a nondeductible risk of this size, don’t risk it. Get the appropriate advice you need today from your CPA.