In a recently published Frequently Asked Questions (FAQs), the IRS addressed the deductibility of employer-sponsored reimbursements for individual health insurance premium policies. Read the full Q&A here.
What does it mean?
Beginning January 1, 2014, employers are no longer permitted to reimburse employees for insurance premiums for the purchase of an individual policy – whether the policy is purchased on- or off-exchange – as a tax-free benefit. Instead, any employer-reimbursed insurance premiums for individual health insurance policies are subject to all applicable federal and state income and payroll taxes that would otherwise apply.
The IRS does not prohibit employers from increasing employees’ salaries to contribute to the cost of purchasing individual policies. However, pre-tax reimbursements to employees for individual policies are no longer allowed. Reimbursements now must be treated as taxable compensation for the receiving employee and included in all income reporting.
What is the penalty for providing tax-free reimbursements for individual health insurance plans?
Per the IRS: “such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.”
Read the full IRS Notice 2013-54 notice here.
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