Initially, many employers' reaction to the Affordable Care Act (ACA) coverage mandates was to drop all employer provided coverage, let employees buy their own coverage and reimburse the employees for the premiums.  Following up earlier guidance, the IRS warns that providing reimbursements on a pre-tax basis risks costly penalties, up to $36,500 per individual per year.

Some employers had reimbursed employees for health insurance premiums by paying the employee based on receipts for premiums or by paying the premiums to the insurance company directly.  This was referred to as an "employer payment plan".  Employers had excluded these reimbursements from employee income.  No longer.  Under recent IRS guidance, the reimbursements must be taxable income to the employee to avoid ACA penalities.

Q&A's issued by the IRS warn that employer payment plans are subject to the ACA market reforms and cannot be integrated with individual policies. Such reimbursement plans thus fail to comply with ACA.  Non-compliance brings excise tax penalties of $100 per day per individual.

Employers can, however, maintain employer payment plans as long as the employee's choice is between after-tax reimbursements or cash which results in taxable income to the employee equal to the reimbursement amounts.

Employer payment plans had been used in individual or small group severance arrangements, sometimes as a "one off" accommodation. Any employer payment plans should be examined and, if in current use, should be properly reported as taxable income.