On November 6th, 2014, the Department of Labor issued new guidance that clarifies how the Affordable Care Act is changing the tax treatment for the reimbursement of individual health insurance premiums.
Previous to this new legislation and clarifications, employers were allowed to either pay for, or reimburse, the cost of employees’ individual healthcare premiums on a tax-free basis. The new legislation and last week’s guidance from the Department of Labor now prohibits this practice. This is effective for the 2014 tax year and affects any employer with 2 or more employees that does not have a group plan. As a result, if you are an employer reimbursing the premiums for your employees’ individual health care premiums, you must now include this reimbursement as taxable income on the employee’s paychecks and W-2. This income is subject to the normal federal income tax, FICA, Medicare, and state withholdings.
If you have a group health plan, nothing changes; the changes are only for employers that reimburse the cost of individual health plans.
Note: If the employer (including an S-Corporation) has only one participant in a health reimbursement arrangement, the corporation is allowed to reimburse that employee on a tax-free basis as before the ACA rule changes. If that person is a more than 2% shareholder of the S-corporation, the rules still require that the cost of the premiums reimbursed be included in wages in order to allow an above-the-line deduction for the shareholder. FICA and Medicate need not be charged.
Employers with more than one employee that have traditionally reimbursed their employees on a pre-tax basis for their individual health care premiums must now either (1) eliminate their health benefits entirely, (2) establish group health insurance coverage for their employees, or (3) add an amount for health insurance on their paycheck as regular (taxable) compensation.
Penalties for continuing to reimburse employees on a tax-free basis face severe penalties of $100 per day, per employee.
Please let me know if you have any questions regarding this.