Employer Health Care Arrangements – $36,500 Per Employee Per Year Penalty

While you may think you’re safe from one of the $2,000 or $3,000 Pay or Play penalties, you might be positioned for an even greater penalty – to the tune of $36,500 per employee, per year – if you offer reimbursement plans instead of coverage.

Q1. What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?

Under IRS Notice 2013-54, such arrangements are described as employer payment plans. An employer payment plan, as the term is used in this notice, generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, 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.

If you offer an HRA (excluding those for retiree-only, accident-only, disability income, limited-scope dental and vision benefits, and certain long-term care benefits) make sure your plan is integrated with your group health coverage for compliance. A non-integrated reimbursement plan may trigger this excessive penalty.