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IRS Reaffirms Massive Penalties for Companies Paying for Health Care Plans with Pre-Tax Dollars

By November 1, 2014November 28th, 2018Employment Law

As a related note, the IRS has reconfirmed earlier guidance that prohibits companies who do not establish individual health care plans from reimbursing employees for health insurance premiums or paying for them with employees’ pre-tax dollars (not including them in taxable income). Per Notice 2013-54, the penalty can be up to $100 per employee, per day, which amounts to $36,500 per employee, per year. The IRS guidance to this specific question is as follows:

Under IRS Notice 2013-54, such arrangements are described as employer payment plans. An employer payment plan, as the term is used in this notice, generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.
After-tax arrangements to pay for individual health insurance policies are permissible. However, employers who pay for individual health insurance policies on an after-tax basis must ensure they fall within the Department of Labor’s voluntary plan safe harbor. A plan falls within the safe harbor if

  • The employer makes no contributions;
  • Participation is completely voluntary;
  • The employer’s involvement is limited to permitting the insurer to publicize the program and to collecting and remitting premiums;
  • The employer receives no consideration for collecting and remitting premiums, other than reasonable compensation.

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