Can My Employer Reimburse My Individual Health Insurance Premiums?

No, but that might change

Patient giving nurse medical identification card in clinic
Individual Health Insurance Premiums. Hero Images / Getty Images

The Affordable Care Act only requires employers to offer health insurance benefits—to employees who work at least 30 hours per week—if they have 50 or more employees. But 96 percent of employers in the US have fewer than 50 employees, and are thus not required to offer health benefits to their workers.

Many of them do, of course. According to a survey conducted by the Transamerica Center for Health Studies in August 2015, health insurance benefits are offered by 61 percent of businesses with fewer than 50 employees.

 Small group health insurance plans are available in every state, and employers with fewer than 25 employees can be eligible for a small business health care tax credit, depending on their employees' average income and how much of the premiums are paid by the employer. 

But what about the people who work for all of the small businesses that don't offer health insurance benefits? They have to use the individual health insurance market, where they can purchase coverage through the health insurance exchange, or outside the exchange (subsidies are not available outside the exchange).

No Employer Reimbursement Allowed

For plans purchased in the individual market (on or off-exchange), the enrollee—as opposed to an employer—is responsible for paying the premiums, although subsidies (which are actually tax credits) are available in the exchange for people who qualify based on their income.

Employers are not permitted to reimburse employees for the cost of individual health insurance.

The ACA itself left this somewhat open to interpretation, but the IRS has subsequently addressed the issue directly, and the penalty for non-compliance is steep: an excise tax of $100 per day, per applicable employee. That can be as high as $36,500 per year in fines for each employee for whom the employer reimburses individual health insurance premiums.

The regulations were scheduled to take effect in January 2014, but a transitional relief program was put in place that delayed the penalty until July 2015.

Essentially, the way the IRS looks at it, reimbursing employees for individual market premiums is considered an "employer payment plan." Such plans are subject to group health insurance market reforms, including the ban on lifetime and annual benefit limits, and the requirement that certain preventive care be covered at no cost to the enrollee

And, the IRS has specifically clarified that employer payment plans cannot be combined with individual market health insurance plans in order to fulfill the market reform requirements. This is true regardless of the fact that the ACA's market reforms do apply to individual market plans, and all new individual market plans are sold without lifetime or annual benefit limits, and with the same preventive care benefits as small group health plans.

There's nothing preventing employers from giving their employees a raise or taxable bonus in lieu of providing health insurance benefits.

But the tax-advantaged benefits of group health insurance premiums and health reimbursement arrangements are not available to be used in order to reimburse employees for individual health insurance premiums.

H.R. 5447: Small Business Health Care Relief Act

That could change, however, if H.R. 5447 becomes law. The bipartisan legislation, known as the Small Business Health Care Relief Act of 2016, would make it legal for employers to reimburse up to $5,130 annually in individual market health insurance premiums for an employee, and up to $10,260 if the policy covers the employee's family (these amounts would be indexed for inflation).

H.R. 5447 passed the House of Representatives in June 2016, and is now with the Senate. The legislation has the support of the U.S. Chamber of Commerce and numerous small business advocacy organizations.

The Congressional Budget Office has determined that HR 5447 would have "no effect on federal budget deficits over the 2016-2026 period." Money reimbursed to employees for health insurance premiums would be pre-tax, resulting in lower federal income tax revenues. But the federal government would not have to provide premium subsidies to exchange enrollees whose employers opted to reimburse their premiums.

H.R. 5447 has a provision to prevent "double benefits" in the form of an employer reimbursement and a premium subsidy. So an employee who buys coverage in the exchange would not be eligible to receive a premium subsidy through the exchange while also receiving a premium reimbursement from his or her employer (this is along the same lines as the rule that prevents tax filers from deducting medical expenses that were paid or reimbursed by a third party).

Who would be helped by H.R. 5447?

For employees who work for small businesses that don't offer health insurance, the availability of premium subsidies in the exchanges depends on income, along with family size and the cost of coverage in the applicant's area. In general, subsidies are available in most cases if the applicant's household income doesn't exceed 400 percent of the poverty level.

If you're currently receiving a premium subsidy (premium tax credit) in the exchange and your employer begins reimbursing premiums under H.R. 5447, the exchange subsidy would be reduced by the amount of the employer reimbursement. 

But if you're not eligible for a premium subsidy in the exchange (or if you are, but have opted to buy your coverage outside the exchange, where subsidies aren't available), H.R. 5447 could directly benefit you. If the legislation passes and your employer decides to take advantage of the option to offer pre-tax reimbursement for individual health insurance premiums, you would get some relief over the current situation.

Small employers would not be required to reimburse premiums, just as they are not required to offer group health insurance under the ACA. But H.R. 5447 would allow them the flexibility to reimburse employees for health insurance premiums as part of their employee benefits package. 

The premiums being reimbursed would be in the individual market, which has had much more volatile premiums than the small group market over the last few years. Some proponents of H.R. 5447 note that the legislation would encourage more people to enroll in individual/family coverage, bringing added stability to the individual market.

Sources:

Congressional Budget Office, H.R. 5447 Small Business Health Care Relief Act of 2016. Accessed 7/2/16.

Internal Revenue Service, Employer Health Care Arrangements. Accessed 7/2/16.

Internal Revenue Service, Small Business Health Care Tax Credit and the SHOP Marketplace. Accessed 7/2/16.

Transamerica Center for Health Studies, Survey: Companies Navigate the Health Coverage Mandate, December 2015, Accessed 7/2/16.

The White House, Health Reform for Small Businesses. Accessed 7/2/16.

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