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Health Insurance Reimbursement Plans

Under the provisions of the Affordable Care Act, employers will no longer be able to offer pre-tax reimbursement to employees for health insurance premiums paid by the employee individually. If an employer offers this benefit to more than one employee, then this violates the Affordable Care Act and will subject the employer to penalties.

If you have this type of arrangement, you will have to treat the premiums paid as taxable compensation in 2014.

Since 1961, the tax law has allowed employers to treat substantiated reimbursements of health insurance premiums as a qualifying tax exempt health insurance fringe benefit. The ACA eliminated this.

Unfortunately, many small businesses have used this provision for years to provide health insurance benefits to their employees at a lower cost that having a group health plan.

Here is the guidance from the IRS in Notice 2013-54 which was released in September:

A. Guidance on HRAs and Certain other Employer Healthcare Arrangements, Health FSAs, and Employee Assistance Programs or EAPs Under the Joint Jurisdiction of the Departments

1. Application of the Market Reform Provisions to HRAs and Certain other Employer Healthcare Arrangements

Question 1: The HRA FAQs provide that an employer-sponsored HRA cannot be integrated with individual market coverage, and, therefore, an HRA used to purchase coverage on the individual market will fail to comply with the annual dollar limit prohibition. May other types of group health plans used to purchase coverage on the individual market be integrated with that individual market coverage for purposes of the annual dollar limit prohibition?

Answer 1: No. A group health plan, including an HRA, used to purchase coverage on the individual market is not integrated with that individual market coverage for purposes of the annual dollar limit prohibition.

For example, a group health plan, such as an employer payment plan, that reimburses employees for an employee’s substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However the employer payment plan will fail to comply with the annual dollar limit prohibition because (1) an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and (2) an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

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