Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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The lowdown...

  • After a 50-year run, the tax laws surrounding HRS’s and EPP’s were changed, held at bay and then changed again to benefit keeping the HRA
  • Health Reimbursement Arrangements are considered tax-free income that is used for the benefit of ongoing health of an employee
  • Employee Payment Plans are considered limited in scope and in violation of the ACA regulations
  • Tax law currently views HRA’s as a viable group health insurance option, but still, maintain that an EPP is in violation of the health reform laws
  • Establishing a well-managed HRA, or finding marketplace group coverage is the best way for your small business to stay both ACA and IRS compliant

Understanding what is taxable when it comes to employee reimbursement for medical insurance is confusing, especially if you have not had the opportunity to keep up with the rapid changes. Below is critical information about the types of reimbursement plans and how they are viewed by the IRS.

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Small Employer Options for Providing Affordable Health Insurance

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Small businesses have felt the brunt of financial responsibility in the constantly changing weather of health reform. The seas have gone from calm to stormy and back again at little-to-no notice. The expense of providing affordable health insurance has been an unexpected obstacle in trying to maintain daily operations, meet payroll and try and focus towards business growth.

One particularly irksome detail has been the ever-changing tax laws regarding some of the choices that have been available to provide health insurance options.

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Tax Law History of Reimbursement for Medical Insurance

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The small business owner has left virtually no stone unturned in attempts to find health insurance coverage that is quality mixed with affordability. In some instances, they have preferred sending employees out into the open market to get their own individual plans, but reimbursing the employees for the cost.

The up and down nature of the tax-free status of reimbursements for employees has left many business owners confused.

Revenue Ruling 61-146

This tax ruling stood for well over 50 years and provided for the tax-free reimbursement of employees for their costs in obtaining private-sourced health insurance. Both HRA and EPP plan reimbursements were included.

Section 4980D of 2014

Small business employers were caught off-guard with the new rules of health reform.

Utilizing an EPP or HRA for more than one employee was considered a serious violation of the reform laws and subjected an employer to stiff penalties.

These fines were set at $100 a day per employee, for an annual grand total of $36,5000 each.

Notice 2015-17

The IRS sensed the outrage of employer’s that were caught unawares and retreated a bit with this ruling. They allowed for a reprieve from the penalty until July 1, 2015. At that point, the employers were expected to have standardized health plans in place.

21st Century Cures Act of 2016

President Obama signed this Act into existence as a measure to help save the options for employer funded HRA. It still placed serious restrictions on EPP’s, but HRA’s are acceptable when the guidelines are followed to the letter.

Health Reimbursement Arrangements (HRA)

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A Health Reimbursement Account is owned and funded by an employer. Money is added to an account for each employee to be used for qualifying medical expenses like premiums, deductibles, and other group medical expenses. Am employee can access and use the funds as soon as they are available.

The employer keeps any left-over funds if the employee quits or loses their job.

Employee Payment Plan (EPP)

These types of health insurance reimbursement plans have been debated and pushed back by the IRS since the start of health reform. Problems arise in knowing how much of the money spent by an employer on an employee health insurance policy has been with pre-tax dollars.

Paying for individual health plans on and off the market is in violation of the ACA rules and regulations. This ruling was designed to avoid “double-dipping” of tax savings by employers. Businesses that persist in obtaining and paying for individual plans for employees are subject to the penalties described above with Section 4980D.

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Why tax laws on employee reimbursement continually shift?

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The fluctuations in the tax laws regarding employer reimbursement to employees for health insurance have not been without much legal debate and careful thought. They have also been with the purpose of trying to protect the American worker.

There was an intended rush of smaller employers that wanted to take advantage of using tax-free money to assist employees into the marketplace to obtain their health insurance. This placed the burden and stress squarely on the employee to obtain bare minimal coverage with the limited funds provided.

Although some forgiveness was shown in a reprieve from the penalties, the EPP plans are still hammered by the IRS as a violation of “unlimited coverage.”

What is the current tax law regarding reimbursement of medical insurance?

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As long as an employer is reimbursing an employee for a group health insurance plan, the money paid is not considered taxable income.

An Employe Payment Plan can be wisely set up to resemble a Health Reimbursement Plan, but the moment any dollars go towards individual plans, the IRS will deem it a violation of heath reform law and your company will be subject to the harsh penalties of $36,500 per yer, per employee.

With 50 and more employees, this amount adds up quickly. It is safer to simply fall back and create a more traditional HRA if this seems the best option for your business.

Is it better to go with a Marketplace plan?

There are many legal tax considerations to make before deciding which is the best way to go in offering affordable health insurance to employees.

Employee reimbursement plans can work if they are established and administered correctly, but you may want to shop around and see what is available in the Marketplace for group coverage.

You can eliminate a lot of hassle and worry by going the more traditional route. The tax incentives make it worth taking the time to have a serious look.

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Staying ACA and IRS Compliant

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As an employer, it is incumbent upon you to strike a balance in maintaining compliance with ACA regulation and IRS demands. They may seem at odds in some respects, but they really work in tandem to try and ensure that the employee is receiving the unlimited medical coverage required, at the minimal out-of-pocket expense for basic services.

The most sensible approach is to find a quality group plan that you can initiate for the business, or reimburse all employees that sign up for the coverage through an HRA.

Keeping health insurance costs down has been an undeniable struggle for smaller business owners. The added stress of what seems to be constant changes in tax regulation make it even harder to keep up with what options are still available.

Get in touch with a health insurance professional today and see what types of health insurance reimbursement plans will provide the best coverage for your employees and help you stay in good shape with the IRS.

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