A little known and very under-publicized change to the insurance tax laws that took place on January 1, 2014, has exposed employers to a potentially heavy excise tax if they reimburse employees for health insurance premiums vs. enrolling in group plans. This includes employee shareholders.
Employer reimbursements or direct payment of health insurance premiums for individual policies or coverage under a spouse’s policy may be deemed a group health plan subject to the Affordable Care Act’s (ACA) market reforms if they are made for more than 1 employee. The deemed group health plan would not comply with the ACA’s benefit mandates for group health coverage and would be subject to excise taxes of $100 per day, per employee with no limit.
While the new laws have been in place since January 1, 2014, there is some transition relief for small employers. Employers that are not subject to the ACA employer shared responsibility provisions will not be subject to the excise tax for any month of 2014 or from January 1 – June 30, 2015.
In the case of an employee healthcare arrangement with a 2% shareholder of an S Corporation, the excise taxes will not apply until further guidance is issued or at least through the end of 2015. This relief does not apply to employees who are not 2% or greater shareholders of the corporation.
Employers are encouraged to review any reimbursement plan they may have in place as soon as possible (including those built around compensation) to ensure that they aren’t inadvertently pulled into a noncompliance group health plan subject to daily excise taxes.