The Affordable Care Act requires employers with 50 or more employees to provide health coverage for their employees or face stiff fines. To comply with the new law, many employers were canceling their group health plans, dumping their employees into the health exchange (which is Covered California in this state), then reimbursing those employees for some or all of the employee’s cost of purchasing individual coverage, and then claiming a tax deduction for the amount of the reimbursement.
This practice is now illegal, according to a new ruling from Internal Revenue Service (“I.R.S.”), and could subject employers to a penalty of $100 a day — or $36,500 per year — under Section 490D of the Internal Revenue Code for each affected employee.
When an employer reimburses an employee for individual health coverage, that employer creates an “employer payment plan.” The new I.R.S. ruling concludes that all “employer payment plans” will be considered “group health plans” subject to all of the provisions and requirements of the Affordable Care Act, including the requirement to provide certain preventive care (like mammograms and cancer screenings) without co-payments or other costs. Obviously, employer reimbursements plans do not meet these requirements because they are not providing any care at all.
As a result, any employer who is currently covered by the new healthcare law and who is also reimbursing its employees for some or all of their insurance costs should contact their accountant or legal advisor for more information. If you are interested in reading the I.R.S. notice, you can find it here.