As I make presentations to employers about PPACA compliance, I am frequently met with proposals from clients that they have been told that the solution to their problem is to reimburse employees for exchange premiums with pre-tax dollars.  The thought is that by doing so they would avoid penalties and taxes as well.  Unfortunately, it does not work that way.

Under Revenue Ruling 61-146, if an employer were to reimburse an employee for health insurance premiums for a non-employer sponsored plan (such as individual coverage), that payment would be exclude from gross income under Code Section 106.  This exclusion would apply if the employee was reimburse based on a substantiated payment (like a copy of a bill) or if the payment as made directly to the insurance carrier.  So that would seem like it is ok to pay for their exchange premiums for individual coverage.

However, along came IRS Notice 2013-54, which substantially limits the ways in which an employer can assist with individual premiums.  In technical terms, this guidance provides that any employer payment plan that reimburses employees for an employee’s substantiated individual market insurance policy premiums must satisfy the market reforms for group health plans.  But since the employer payment plan will fail to comply with the annual dollar limit prohibition because it will be considered to impose an annual dollar limit and cannot be integrated with any individual health insurance policy purchased under the arrangement, such an arrangement does not satisfy PPACA’s rules.  The practical effect, then, is that a reimbursement plan does not work for exchange coverage.  You cannot reimburse employees for exchange premiums with pre-tax dollars.

Now, small employers who participate in the SHOP Exchange can reimburse employees with pre-tax dollars, and pre-tax dollars can still be used for other benefits, like vision or dental. And even SHOP Exchange reimbursement programs are still subject to the Section 125 cafeteria plan rules.  In any event, the idea that an employer outside of the SHOP can pay for coverage on the exchange with pre-tax (non-compensation) dollars is pretty much destroyed.

Plus, large employers reimbursing employees for premiums for other coverage does not constitute offering a health plan for purposes of avoiding the excise tax penalties.  So large employers who chose reimburse employees for their exchange (individual policy) premiums have to do it on a post-tax basis (meaning the money is compensation) and also run the risk of failing to offer coverage to “substantially all” of their full-time employees if this is the only option the use.  So employers should be careful when considering how they develop their PPACA compliance program over the next year.  Lots of things have changed and will continue to change.  Consult before you buy so that you don’t make a mistake.