Employer Reimbursement of Employee’s Individual Medical Insurance May Subject Employer to Penalty

By Robin C. Gilden

IRS Notice 2013-54 provides that an employer’s reimbursement of healthcare insurance premiums paid by an employee on an individual health insurance contract of the employee on a pre-tax basis (an “employer payment plan”) may violate: (1) the prohibition on annual limits for essential health benefits and (2) the requirement to provide certain preventive care without cost sharing contained in the ACA. This violation could subject the employer to the $100 a day excise tax under Section 4980D of the Internal Revenue Code of 1986, as amended (the “Code”). However, Notice 2013-54 provides that, for purposes of Notice 2013-54, an “employer payment plan” does not include an employer sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Notice 2013-54 includes a telephone number for an ACA Hotline. I recently spoke with a representative of the Chief Counsel’s Office of the IRS. The representative informed me that the reimbursement must be considered to be “wages” for purposes of the Federal Insurance Contributions Act (“FICA”) in order for the reimbursement to not be an employer payment plan. This is interesting since there is a United States Tax Court Case, affirmed by the United States Court of Appeals, and an IRS announcement that conclude that such payments are not wages for purposes of FICA.

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