Before the ink on the Affordable Care Act was dry, prudent employers were analyzing the law to identify ways to save money and avoid many of the punitive aspects of the law. One question which has repeatedly been asked of myself and other employment lawyers is whether it would be lawful for employers to simply “get out of the healthcare business,” i.e. allow employees to take the tax-free funds which would otherwise be spent by the employer, to use themselves in the healthcare exchanges to purchase their own insurance plans. This week, the Internal Revenue Service (IRS) answered that question with a resounding “No.”

The IRS ruled that it would consider such a reimbursement plan to be a “health care plan” subject to all of the requirements of health care reform. Since those requirements would be impossible to meet, the plan would be subject to an excise tax of $100 per day per applicable employee (which is $36,500 per employee, per year). The IRS’ opinion on the matter can be found here.  

The takeaway is that the IRS has effectively made it impossible to dump employees off an existing health care plan and instead offer pre-tax money towards purchasing health insurance on an exchange. Of course, an employer can always just pay employees higher wages, and discontinue insurance, but both the employer and employee will have to pay additional taxes. Moreover, it is a lot easier to convince employees that their salary includes a payment for insurance, if it is accounted separately. Once the money is included as wages, it will likely simply be seen as an entitlement.