Are pre-tax dollars allowed for company payments for individual health coverage?
The jury is still out.
As many of us have seen, the implications of the Affordable Care Act continue to unfold and evolve. The latest IRS notices and legal interpretations to be aware of relate to pre-tax dollars relative to health insurance premiums.
At Precision Payroll, we are always exploring new programs that benefit our clients, and strive to keep you informed of recent developments. This article is intended to make you aware of the current ambiguity in IRS regulations on this topic, and expand your knowledge and ability to make informed decisions on this critical aspect of your employee benefits program.
“As a result of healthcare reform, employees now have options when it comes to acquiring health insurance independent from their company group plans—especially now that pre-existing condition exclusions have been eliminated.” says Leslie Day, PPA’s Director of Human Resources Consulting. “With the multitude of individual plans available through the new Exchange/Marketplace, the motivation for an individual to look outside their company’s plan is now greater.”
When this happens, companies may wish to reimburse employees for some of the cost of these individual plans. The question at hand: Is this a pre-tax payment, or is it legally income to the employee, and therefore should be taxed?
Per ERISA (Employment Retirement Income Security Act), the law allows for companies to withdraw employee healthcare insurance premiums for their group health plan from an employee’s salary before that income is taxed. This has not changed.
The issue now relates to payments made by companies to reimburse employees for their own individual purchase of health insurance—individually acquired polices that are not part of the company group insurance program.
Companies may choose to provide employees money to reimburse these individual policy premiums using payroll, via a company check, or using a vendor company payment plan.
The IRS has been a bit obtuse—o.k., really obtuse!—in advising us on the taxability of these company payments. We would guess that companies would prefer to make these payments on a pre-tax basis if it was determined to be legal, as this would save their employees thousands of dollars each year.
But the potential risks are huge. If a company was found to be improperly paying an employee with pre-tax dollars, they may be required to pay the IRS the taxes due, plus interest and penalty, retroactively. Based on each employee’s withholding exemption, these tax payments can be hundreds of dollars per employee per month. In addition, the IRS recently announced an excise tax of $100/day per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code for improper pre-tax health insurance payments.
From a legal standpoint, benefits attorneys are advising to only use post-tax money for these reimbursements. They are citing several recent IRS statements. The IRS issued a Q&A related to the topic on May 13, 2014, as well as a notice in the fall of 2013, eliminating two previously used options for pre-tax payments. Although the IRS has been obtuse, the employment attorneys seem to be in agreement in their interpretation of the IRS’s statements, and believe that the IRS has closed the door on any possible pre-tax payments. (See the summary chart of legal interpretations).
To add to the confusion, there is still a lack of clarity on possible loopholes on this topic. Some vendors are strongly defending their program’s ability to manage pre-tax employee payments for individual (non-company) health plans. These vendor programs provide a framework under which pre-tax payments are made to employees. It is too soon to fully rule out the viability of these programs.
We expect to see more IRS notifications and legal interpretations in the future, as well as other programs by vendors to exploit possible remaining loopholes. This discussion is far from finalized.
If you are currently providing pre-tax payments for individual employee health insurance and wish to change to a post-tax payment, please call your payroll processor, and a non-tax insurance field will be opened for your payments. If you wish to continue these payments on a pre-tax basis, no change is needed in payroll. However, we will request that you provide us your intent in writing.
If you wish to investigate a vendor-provided plan to handle pre-tax payments, please contact Gary Young at Precision Payroll 630-242-1522, or email@example.com.
Again, there is no change for employee’s own contributions for their company-provided health insurance. This is still clearly allowed to be pre-tax with a POP plan in place. (See “Do You Have a POP” below).
This issue is critical for each client to understand, in order to make informed decisions accordingly. Leslie Day is available to answer questions you may have on this topic. You may reach her at 630-785-2205 or firstname.lastname@example.org. And as always, we recommend contacting your legal counsel or CPA to ensure your compliance with IRS and ACA requirements.
Lawyer Opinion Summary
Pre-Tax and Post-Tax Options For Employer Contributions
for Medical Insurance
TAXED AS INCOME
|Employee participates in company group insurance plan (qualified plan with POP)||X|
|Employee has option to participate in company group insurance but chooses to buy their own medical insurance||X|
|The company does not offer medical insurance and provides a payment to the employee via payroll to cover part of or all of their premium||X|
|The company does not offer medical insurance and pays the bill for the premium for the employee with a company check (Revenue ruling 61-146)||X|
If you deduct pre-tax dollars from your employees’ paycheck for their contributions to their group health insurance premiums, you need to have a POP in place.
What’s a POP? It stands for Premium Only Plan, and it confirms that the ERISA (Employment Retirement Income Security Act) requirements are met, and “qualifies” a company’s ability to deduct the employees’ portion of their insurance premium from their pay before it is subjected to income tax.
While PPA can set up a field for pre-tax contributions in your payroll, you should also make sure you have a POP in place. POP’s are easy and affordable to implement. For more information on setting up a POP plan, contact Gary Young, 630-242-1522, or email@example.com.