Immediately after the Affordable Care Act ushered in a new regime of health care coverage, cost-conscious employers began pondering an obvious question: Could an employer scrap its group health plan in favor of pushing employees into the government-regulated health exchanges while reimbursing them for premiums paid? Last month the IRS reiterated its answer to this question: No, unless the employer is willing to pay a substantial excise tax.
In a brief Q&A posted on its website, the agency stated that an arrangement in which an employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance, would be considered a "group health plan" subject to the market reforms of the Affordable Care Act. As the recent Q&A and IRS Notice 2013-54 clarify, "such arrangements cannot be integrated with individual policies to satisfy the market reforms," including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.
An employer that runs afoul of these requirements will be subject to a $100 per day excise tax per applicable employee (totaling $36,500 per year per employee) under Section 4980D of the Internal Revenue Code.
On a separate note: The Affordable Care Act's "employer mandate" – requiring employers of 50 or more full-time employees to pay an excise tax or to offer such employees and their dependents affordable, minimum essential coverage – is slated to become effective January 1, 2016 for mid-sized employers (50-99 full-time employees), and phased in beginning January 1, 2015 for large employers (100 or more employees).