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:
- 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)
- The employer pays part or all of the cost of a excepted individual or group insurance (dental, vision, hospitalization and limited benefit indemnity insurance)
- 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)
- The employer contributes to a payment plans or reimbursement plans that integrate with excepted benefits (employer contributions integrated with #2 above)
- 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.