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by Tony Novak, CPA, MBA, MT April 1, 2014
Employers across the U.S. both large and small now recognize that they can save substantial amounts by cancelling their group health insurance plans and sending employees to the individual health insurance exchange. One of the overall social goals of health care reform from the employees perspective was to make health insurance coverage available independently from the employer and allow portability of coverage as employees change jobs. There is no requirement that employers provide health insurance. Coverage is completely voluntary for small employers without any negative consequence for those for choose to offer no coverage. Even larger employers - those with more than 50 employees - can opt pay a relatively small additional tax rather than provide coverage.
The federal government faces conflicting policy goals: the desire to encourage employer contributions to employee health care expense and the desire to discourage "double dipping" into the benefits offered through employer health plans and the benefits offered through the individual insurance exchange system. This conflict will likely result in additional clarifying legislation over the next several years.
Many employers already made the switch to individual health insurance coverage in the beginning of 2014 and even more will follow in 2015 and 2016. While a change may be made at any time larger employers tend to change health benefits effective January 1. Smaller firms are more likely to make a change mid-year especially when there is the expectation of realizing immediate savings.
Employers often wish to help pay all or part of the cost of individual health insurance coverage and certainly they may legally do so. The question that remains is how the employer contribution will be taxed under the new provisions of the Affordable Care Act. There are two distinct options with regard to tax treatment and a third hybrid option of combining features of the first two options.
An employer may provide health insurance benefits on the same tax basis as any bonus plan. In this case, the value of the employer's contribution is simple added to taxable wages. This is a simpler approach with no adverse tax risks. It is important that the employer make the payments to the employee and not make the payment to an insurer. Additionally, the amount of the payment should be on a "defined contribution" basis and not be based on the cost of insurance. There is no requirement to provide this benefit to all employees; it may be provided on a discriminatory basis in the same way that individual salary amounts are negotiated differently for various employees.
While there is no legal requirement that these plans be in writing, Freedom Benefits recommends that all employers, no matter how small, use a well documented health plan and we offer help with prototype plan documents and the accounting setup of these plans at little or no cost to employers. There is no requirement that these be "accountable reimbursement plans" so that greatly simplifies the setup and administration.
Tax-free employee health plans must meet the tough new requirements of the Affordable Care Act as well as all of the older requirements of federal laws known by the acronyms ERISA, COBRA and HIPAA as well as the IRS requirements for accountable reimbursement plans. The most significant new legal requirements for new employer health plans imposed by the Affordable Care Act are PHS Act 2711 (no annual limit on coverage) and the PHS Act 2713 (requires preventive care).
An employer might establish a Healthcare Reimbursement Procedure (HRP) that is not considered an employer health plan or a premium payment plan under the law as described in TR 2013-03. A plan allowed by Section 105 of the tax code called a Medical Expense Reimbursement Plan (MERP) as the most likely approach.
While we are aware that one or more employee benefit firms is endorsing this approach, it is important to recognize that these endorsements specifically disclaim any responsibility for tax or legal advice. We are not aware of any CPA firms or attorney that offers an unqualified endorsement to this approach. The fact is that no one knows what the IRS will do in the future regardless of anything that has been said or written so far. Since Freedom Benefits is operated by a Certified Public Accountant, we must be clear that we are not offering an opinion that the tax free approach will be allowed by the IRS. We recognize the need for additional clarification and the likelihood that future direction of tax policy with regard to this specific issue will be influenced by the unpredictable political process.
Freedom Benefits offers individualized help with the design, setup and administration of these plans.
An employer might achieve the same net effect of a tax-free health plan by combining plans and using the best attributes of each. The employer might adapt a plan to make payment to those employees who purchase coverage but actually make the payment in another form. For example, the employer could make a contribution into the Health Savings Accounts (HSA) of those employees who are eligible for the benefits. Similarly, the employer could make a contribution to the Individual Retirement Account (IRA) of eligible employees. IRAs actually include liberal allowances that give employees access to the money without a penalty when a withdrawal is for uncovered medical expenses. Another good alternative is to set up a salary deferral plan that allows the employees to contribute up to $2,500 of wages into a non-taxable Flexible Spending Account (FSA).
These options can be used alone or in combination to increase the total amount of health coverage. Instead of paying the employee directly, the employer makes a tax-deductible contribution to the plan selected and the employee avoids recognizing any income at this time the contribution is made.
Freedom Benefits offers help with the planning, documentation, setup and administration of all of these plans. There is typically no additional cost for current accounting or financial planning clients since this is incorporated as part of the overall service but "stand-alone" employee benefit plan services are available through FreedomBenefits.org.
Opinions expressed are the sole responsibility of the author Tony Novak and do not represent the opinion of any other person, company or entity mentioned. Information is from sources believed to be reliable but cannot be guaranteed. Freedom Benefits is not an agent, broker, producer or navigator for any federal or state health insurance exchange but may provide advice, reviews and referrals to these official resources. Novak is compensated as an accountant, adviser, affiliate consultant, marketer, reviewer, endorser, producer, lead generator or referrer to some of the commercial companies listed on this site.