A common question from our clients:
“Can I let my employees buy their own health insurance and reimburse them?”
Before 2014 the answer to this question was “yes,” using what is known as a Section 105 plan. These plans allowed employers to reimburse employees on a pre-tax basis. However, under IRS rules issued in September 2013, such plans are now considered “group health plans” that must meet all of the requirements of plans under the Affordable Care Act, such as offering preventative services and unlimited lifetime benefits. So beginning in 2014, although the answer to this question is still “yes,” reimbursements are now taxable to the employee, which negates the tax savings of offering such a benefit to employees.
Adding insult to injury: employers who offer a Section 105 reimbursement plan could be setting themselves up for a penalty because the plans do not meet the minimum requirements of the Affordable Care Act. The penalty is a whopping $100 / day per employee!
What about Section 125 cafeteria plans?
Although such benefits can still be offered pre-tax, the plans must be integrated with a group health plan that meets the requirements of the Affordable Care Act. Otherwise, the plan would violate the Act and be subject to the same penalties above. Employers should stay away from stand-alone cafeteria plans to fund health insurance.
Many have pointed out that reimbursing employees for their costs of paying health insurance premiums is very different from offering health insurance under a group health plan. Presumably, any reimbursement offered to employees would be used to purchase a policy that adhered to all of the legal requirements of the Affordable Care Act. Therefore, the argument concludes, such reimbursement plans should not be considered group health plans. Although this argument has some merit, so far it has been rejected by the relevant government agencies.