Affordable Care Act Whammy: Changing Health Insurance Premium Tax Rules

Watch out!  The Affordable Care Act (ACA) has wrought a drastic change for all employers providing pre-tax benefits through reimbursement or payment of insurance premiums for employees’ individual heath plans.

For over half a century, employers have been able to offer pre-tax health insurance benefits to their employees, either  (a) by paying for health insurance group plans or (b) by paying for the employees’ premiums, deductibles, and co-payments for their individual plans.  Thanks to the IRS’ and Department of Labor’s recent regulatory implementation of the ACA, however, the second option has been completely eliminated. Consequently, starting in 2014, any benefits paid by employers to employees to cover their individual health insurance premiums or other reimbursement of health insurance costs will no longer qualify as pre-tax benefits.  Instead, the financial value of such benefits will be fully taxed for income and FICA purposes.  This change in the law is not limited to employers with fifty or more employees, as many of the initial notices regarding the application of the ACA had implied. 

What if any relief can be sought?  A few options are available, although they may be challenging for smaller organizations. 

The first option is to get a group insurance plan, for which the premiums will be tax-free to the employee.  With a group plan in place, employers can additionally offer pre-tax health reimbursement benefits to employees if desired, such as for co-payments, co-insurance, and deductibles.   Alternatively, this additional benefit may be offered to an employee whose spouse is covered by a group plan maintained by the spouse’s employer.

The second option is to pursue broader pre-tax benefit opportunities for employees, such as through a cafeteria plan.  Such a plan effectively allows employees to pick and choose from a “menu” of available health-related benefits, with cash in lieu of benefits being one of the choices.  The downside has the expense involved in setting up such a benefits plan, which must be in writing, involves complex legal compliance requirements, and typically requires the assistance of a benefits consulting firm.   Given these realities, now may be the time to promote good will and care for one’s employees, through the establishment of expanded health and other employee-related benefits.  

Tax Exemption Double Standard? Absolutely.

Not all tax exemption standards are created equal. Nonprofit organizations recognized as exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c) are often surprised when subsequent state-based applications for exemption from property and sales tax are denied.

Federal Exemption:  The Starting Point