Federal Agencies Issue Warning to Employer Clarifying the Dangers of Reimbursing Employees for the Cost of Individual Health Insurance Premiums and of Offering Cash Incentives to Opt Out of Employer Sponsored Coverage
In recently issued FAQs (which stands for “Frequently Asked Questions”), the three agencies in charge of compliance with the Affordable Care Act (the “ACA”) alerted employers to three practices that will cause the employer to be subject to ACA penalties of $36,500 per year per person. Importantly, this $36,500 per year penalty applies to each individual affected by the ACA failure. As a result, it can be applied and calculated counting both employees and dependents whose coverage has been affected by the practices described in the FAQs.
Notably, the only small employers excepted from these requirements are employers who have only one employee, and governmental employers. For this purpose, the number of employees are counted looking at all related controlled group companies together. The annual $36,500 per affected individual penalty must be self reported and paid by the employer (on IRS Form 8928).
First, the FAQs alert employers that reimbursing employees for the cost of premiums to purchase individual health insurance policies violates the requirements of the ACA. The FAQs emphasize that the practice violates the ACA regardless of whether the reimbursements are made on a pre-tax or post-tax basis.
Second, the FAQs alert employers that offering a cash incentive to high risk / high claim individuals to opt out of the employer health coverage violates the ACA. The FAQs emphasize that it does not matter whether (i) the cash incentive is offered on a pre-tax or post-tax basis, (ii) the employer is involved or not involved in the employee’s selection of alternate coverage, or (iii) the employee obtains individual health insurance. If the cash incentive option is offered to ALL eligible employees, the violation of the ACA will not occur.
Lastly, the FAQs alert employers that cancelling group health policies and setting up instead a reimbursement program to coordinate with individual insurance policies that employees purchase with premium tax credits on the Marketplace exchange is not permissible. The FAQs point out that the employees who are covered by the reimbursement programs will not be eligible for premium tax credits and that the reimbursement arrangement itself will violate the requirements of the ACA triggering the $36,500 per person per year penalties on the employer.