Want to get your employees into Obamacare? Think again says the IRS

by Michael Haberman on June 3, 2014 · 24 comments

The IRS is the sheepdog that keeps us in line with government healthcare issues.

The IRS is the sheepdog that keeps us in line with government healthcare issues.

When the PPACA, now abbreviated as the ACA and also known as Obamacare, first came out companies started to determine if there was a possible way to minimize the “hassle” factor. They wanted to try to save money and avoid penalties. This was especially true for smaller companies who had just enough employees to make the 50 full time workers mark.

One alternative many thought of was to get out of offering healthcare at all. Of course if they did this the company’s ability to attract employees might be hampered. The question was asked “What if we drop our insurance plan and just give everyone the money to go buy insurance on the Healthcare Exchange? That way employees get healthcare and we get to say we provide for insurance. Everyone is happy.” Everyone it turns out except the IRS.

IRS says NO

According to attorney David Barron of Cozen O’Conner:

The IRS ruled that it would consider such a reimbursement plan to be a “health care plan” subject to all of the requirements of health care reform. Since those requirements would be impossible to meet, the plan would be subject to an excise tax of $100 per day per applicable employee (which is $36,500 per employee, per year).

The actual question asked the IRS was:

What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?

Their answer was:

Under IRS Notice 2013-54, such arrangements are described as employer payment plans. An employer payment plan, as the term is used in this notice, generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.  Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms.  Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.

Find out more about Section 490D here. 


That is certainly a substantial penalty that no company will be able or willing to pay. One alternative that Barron suggested was grossing up every employee’s pay and just get away from the reimbursement aspects that the IRS does not like. However, he points out both parties will end up having to pay more in either payroll taxes or income tax. He also mentions a very true fact. Eventually those increased wages become an entitlement and at some point people begin to forget that their wages include the cost of their healthcare.

The government has made it pretty clear that there are no good alternatives to offering employees health insurance. Not offering it hamstrings your ability to attract quality employees. Reimbursing it is cost prohibitive now because of penalties. Folding it into your compensation program by grossing up what people make also costs everyone in taxes and eventually everyone forgets that was the intent of the higher gross amount and future increases are now based on a higher amount.

Nothing like a good herding approach to compliance! The IRS is the sheep dog nipping at our heels.

Image courtesy of Rosemary Ratcliff / FreeDigitalPhotos.net

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