IRS Quashes Pre-Tax Payments to Employees to Buy Health Insurance


With the Affordable Care Act’s employer mandate looming, some employers have been contemplating circumventing the requirement by boosting workers’ pay with tax-free dollars and sending them off to buy insurance on their own, via the federal or state-run exchanges or the private markets. They would do this to save on the cost of offering qualified employer-sponsored health care coverage. Under IRS Notice 2013-54, these arrangements are referred to as ’employer payment plans.’

‘No dice,’ says the Internal Revenue Service.

The IRS quietly updated a frequently-asked question section on its website last month and clarified that such an arrangement would not satisfy the employer mandate under the Affordable Care Act. What’s more, these plans could stick employers with an excise tax liability of $100 per day per covered employee – a total potential per-head liability of up o $36,500 per year, (per Section 4).

The IRS ruling clarifies Notice 2013-54, which details the ACAs impact on a variety of types of health plans, such as flexible spending arrangements and health reimbursement arrangements.

Included in the scenarios was this circumstance of employers reimbursing workers for part of or all of the cost of premiums of an individual health insurance policy.

The Department of Labor has also issued a similar ruling, in DOL Technical Release 2013-03. The DOL release states, in pertinent part:

Revenue Ruling 61-146 holds that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code §106. This exclusion also applies if the employer pays the premiums directly to the insurance company. An employer payment plan, as the term is used in this Technical Release, does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.”

This isn’t brand new information. Nevertheless, some consultants and benefits brokers had continued to defy IRS guidelines and sell pre-tax reimbursement plans to employers. The IRS has simply clarified that this strategy is not going to get employers out of the fine for failing to comply with the employer mandate.

The ruling pretty much puts the final nail in the coffin on the practice of giving tax-free dollars to employees to satisfy the ACA health insurance mandate on the individual level by buying their own plans on the exchange.

Employers also cannot try to sneak the arrangement under the auspices of a Section 125 plan. These schemes don’t comply with ACA requirements to provide preventive services and minimum essential benefits.

In some cases, it may still be true that employers will be better off dropping their own employer-sponsored group plans and letting employees go apply on their own – potentially qualifying for affordability subsidies in the process. Business simply cannot escape fines when they use pre-tax dollars to do so. They can, however, forward post-tax wages to a health insurer at the direction of an employee, provided the standards of DOL Regulation 29 C.F.R., Sections 2510.301-1 are met.