If you don’t want to take on the task of sponsoring an ACA-compliant health package to employees, reimbursing them for all or a portion of medical insurance costs may seem like a win-win compromise. However, there are several reasons that employee health care reimbursement can be a costly mistake.
What Is Employee Health Care Reimbursement?
There are several forms of medical care reimbursement. In the most common, employers allow employees to purchase health insurance plans while the employer reimburses the cost. This allows employees to choose a plan that works best for their needs, saves employers from having to navigate the process of vetting insurance plans, and often costs less. The expenses are deductible to your business and are not taxed on the employee’s end. This may seem like a logical approach, but it places you at risk of owing tens of thousands of dollars in fines.
IRS Regulations and the Affordable Care Act
The problem with employee health care reimbursement is that it is legally viewed as providing a group health plan when two or more employees are involved. However, because reimbursement does not cover what the ACA considers minimum essential coverage and does not offer an actual plan, you risk being fined for offering an inadequate group plan.
A Small Mistake With Huge Consequences
How big of an impact can this arrangement have on your bottom line? The fine for providing no health benefits whatsoever might be $2,000 per employee per year. The fine for reimbursing employees for health insurance is $100 per day per employee, or $36,500 a year. Few companies can afford to make this mistake. There was a transition period when employers were not fined, but it ended last June.
Legal Alternatives
To avoid getting on the wrong side of the ACA, there are a few alternatives. You can simply stop offering premium reimbursement altogether, adding to employees’ pay instead. As long as the pay does not come with conditions that it be spent on health care, you might pay the much lower fine. Alternately, you can opt to offer an ACA-compliant health insurance plan and avoid fines altogether.
ACA rules are complicated and sometimes counterintuitive. However, failing to comply can come with hefty penalties. It is crucial that you consult with a CPA who can help you navigate the complex regulations governing employees and health care. Call Gary Kaplan, CPA for further information and advice regarding Health Insurance requirements for employees of small businesses.
