What options are available to employers who wish to help employees afford the cost of health care?

Posted on Posted in Employee Benefits, Small Business, Tax Planning, Taxes

Provisions of the Affordable Care Act dramatically changed the tax treatment of employer-paid health benefits. Some of the most popular traditional health plans of the recent past now trigger an extremely harsh tax on the employer. Taxes of up to $36,500 per employee per year kicked in on July 1, 2015 for businesses with less than 50 employees. This post covers the rules for most small businesses with common law employees. It does not cover large businesses, businesses with union employees, one person businesses or S corporation owner/employees.

There are only five options still available to employers that do not trigger additional taxes:

  1. The employer pays part or all of the cost of a qualified group health insurance policy that is sponsored by the employer (the old traditional approach)
  2. The employer pays part or all of the cost of a excepted individual or group insurance (dental, vision, hospitalization and limited benefit indemnity insurance)
  3. The employer contributes to a payment plan or reimbursement plan that is integrated with a qualified employer-sponsored group health insurance plan (employer contributions integrated with plan #1 above)
  4. The employer contributes to a payment plans or reimbursement plans that integrate with excepted benefits (employer contributions integrated with #2 above)
  5. Regular employee bonuses through taxable wages that are not associated with the purchase of health insurance but can be used by employees, at the employee’s option, to buy individual coverage (a regular pay raise)

IRS warned that it is aware that product marketers have misled some small business owners into health plans that trigger tax penalties. References and other background information is available in other posts in this web site. My office offers advice to owners who fell victims to this bad advice. I am available for a limited flat fee telephone consultation to discuss these options in more detail and share ideas on how other small businesses have implemented their response to the new law.

Additional official guidance on this topic is anticipated. In the meanwhile, employers should not attempt any other health plan arrangement.

4 thoughts on “What options are available to employers who wish to help employees afford the cost of health care?

  1. Another accountant pointed out that the term “health care allowance” used by some product vendors does not refer to a health benefit plan and is actually just treated as ordinary wages or taxable compensation as described in #5 above.

  2. My concerns are reinforced that CPAs and business owners are still not aware of the restriction on the health plan options available to employers. I read a thread on a professional forum where a very bright CPA asked a question posed by a business owner client about uninsured medical expense plans and none of the responses addressed the changes to uninsured medical expense plans brought about by the Affordable Care Act.

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