The Internal Revenue Service (IRS) has ruled that employers who give tax-free money to their employees to help pay for insurance purchased through health insurance exchanges will be in violation of the Affordable Care Act (ACA) and subject to tax penalties that could be as much as $100 a day or $36,500 a year, per employee. This ruling effectively prevents employers from shifting costs to the government by “dumping” employees into the new health exchanges rather than providing workers with health coverage, as mandated by the ACA.

According to a question-and-answer document released by the administration earlier this month to clarify the rule, an employer who wants to help employees buy insurance on their own can give workers higher pay, in the form of taxable wages, but both the employer and the employee would owe payroll taxes on those wages.

This new ruling eliminates many arrangements that employers have made in the past with workers to reimburse them for health insurance premiums and out-of-pocket costs. According to the IRS, when an employer reimburses employees for premiums, the arrangement, known as an employer payment plan, is subjected to taxes.

The federal government has already postponed until 2015 enforcement of the employer mandate, which requires employers with 50 or more full-time employees to provide insurance for full-time employees until 2015. Failure to comply carries a penalty of up to $3,000 per employee. The $100-a-day tax is separate from that fee, and will be assessed on employers who fail to provide plans that meet ACA standards.

Contact: Brett Johnson, (800) 786-4262 or bjohnson@cmadocs.org.