Can You Reimburse Employees for Individual Health Insurance?
What was once considered perfectly legal under IRS guidelines which allowed employers to reimburse employees for purchasing individual insurance coverage is now strictly forbidden by new provisions in The Affordable Care Act (ACA).
Prior to 2014, employers were permitted to offer health insurance to their employees and then reimburse them for individual (non-group) health insurance on a pre-tax basis. This concept known as a defined contribution health plan under a Health Reimbursement Arrangement (HRA) and Personal Reimbursement Arrangement (PRA) was popular among many employers and was allowed under IRS Guidelines. However since the beginning of 2014, this type of health insurance planning is strictly prohibited.
IRS Prohibits Employers From Sending Employees to The Exchanges
When the ACA was adopted, many employers saw this as an opportunity to cancel their group health plans and send their employees packing to the individual exchanges. But the Obama Administration caught wind of this mass exodus of employers from the group health market and pressured the IRS to come up provisions that prohibited employers from reimbursing employees for the purchase of individual health insurance on a pre-tax basis on or off the exchanges.
Under the new ruling, the IRS has stated that when an employer reimburses his or her employees for health care premiums, the arrangement is known as an employer payment plan. These employer payment plans are considered by the IRS to be group health plans. Reimbursement for individual health insurance by an employer does not satisfy requirements of the Affordable Care Act.