IRS: Employer Cannot Reimburse Employees Pre-Tax to Buy Through Exchanges

Perhaps the most widely publicized aspect of the Affordable Care Act was the launch of the HealthCare.gov health exchange (for both good and bad reasons), along with numerous state-run health exchanges. With exchanges providing many people with access to healthcare insurance at an affordable cost, it is perhaps not surprising that some employers have considered cutting back on administrative costs by providing their employees with pre-tax funds (via Health Reimbursement Accounts) to be used to purchase insurance through exchanges. 

While this may seem a good idea on the surface, employers doing this could find themselves on the receiving end of a hefty penalty from the Internal Revenue Service.

In May, the IRS issued a notice stressing that employers that reimburse their employees pre-tax for premiums under a Health Reimbursement Account (HRA) to pay for insurance in a health exchange could be subject to a fine of $100 per day per employee ($36,500 per year).

An HRA is a group health plan funded solely by an employer that reimburses an employee for medical care expenses incurred by the employee, or his or her spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period.  This reimbursement is excludable from the employee’s income.

The IRS notice explained that using HRAs to allow an employee to purchase coverage in a state exchange will fail to comply to with the HRA’s annual dollar limit prohibition, and as such it would fail to satisfy the market reforms and be subject to the fine.

As for providing employees after-tax funds with which they can purchase health insurance, the IRS notes that individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan.

Learn more here.