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Your employee reimbursement plan may violate the ACA

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Your employee reimbursement plan may violate the ACA

Like their for-profit counterparts, nonprofits have been scrambling to ensure they’re in compliance with the Affordable Care Act (ACA). Effective Jan. 1, 2015, employers, including nonprofits, with 50 or more full-time employees or the “equivalent” must offer an affordable, minimum level of health insurance coverage to all actual full-time employees — or risk financial penalties. (There are exceptions for midsize employers that qualify for transitional relief.) Smaller organizations aren’t subject to this rule, but all employers are required to inform employees about their options for accessing health insurance.

Such mandates seem straightforward enough. Unfortunately, other elements of the ACA have proven confusing for some organizations. For example, employers that don’t provide insurance but offer to reimburse employees for coverage obtained elsewhere, such as from a Health Insurance Marketplace, may not be in compliance.

What’s changed
For many years, the IRS allowed employers to reimburse employees who paid their own health insurance premiums and to exclude such amounts from the employee’s gross income. But according to IRS Notice 2013-54, employer payment plans that reimburse employees on a pretax basis are no longer allowed as of Jan. 1, 2014. Guidance released by several government agencies on Nov. 6, 2014, stated that such arrangements are the equivalent of group health plans and thus violate the ACA’s market reforms. Offering a reimbursement plan may trigger penalties, including excise taxes under Section 4980D of the tax code.

Employers are also warned to avoid schemes that attempt to skirt the rules. For example, some vendors are encouraging employers to replace their group health policies with reimbursement arrangements and have insurance brokers help the newly uninsured employees buy individual policies from the Health Insurance Marketplace. These vendors claim — wrongly — that the employees will then gain access to premium tax credits.

What you can do is establish an arrangement under which employees choose between cash and an after-tax amount to be applied toward health coverage. But these arrangements add to employees’ taxable income, effectively increasing their cost of buying health insurance. Some nonprofits have scrapped reimbursement plans entirely and simply increased staffers’ wages to allow them to buy their own policies. However, such scenarios also may result in higher income tax for employees.

Unresolved issues
Nonprofits may still be confused about how they can help employees buy health insurance without creating additional financial burdens. Unfortunately, there are no easy solutions. And the IRS has been threatening to impose the maximum penalty allowed by law of up to $36,500 per year, per employee on violators. If your organization has a noncompliant reimbursement arrangement, investigate other options with your financial and insurance advisors.

© 2014

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