As a licensed health insurance broker, I have recommended many cost reduction options to employers over the last 20 years so that they may continue to attract and maintain quality employees. One of the most lucrative alternatives for both the employer and the employee was for the employer to consider offering a stipend to their employees for them to use to purchase their own individual health insurance on the open market. Contrary to popular belief when comparing apples to apples, individual health insurance premiums are almost always cheaper than employer sponsored group health insurance premiums. This is especially true when you subtract the amount the employer pays towards the premium.
Since employer sponsored group health insurance is not taxable to the employer, recommending that employers provide a stipend to their employees to purchase their own individual health insurance would create a taxable event for both them and their employees. However, if the employer deposits that additional stipend into an FSA – Flexible Spending Account – then they would be able to retain the same tax advantages that they have always enjoyed by providing group health insurance. That concept worked and saved both the employer and the employee considerable dollars on premium and significantly reduced tax liabilities. All of this worked great…until Obamacare.
On September 13, 2013 the IRS issued yet another set of ‘new rules’ that sent a shock wave through the health insurance broker and human resources community. IRS Notice 2013-54, essentially put an end to this arrangement. In this notice, the IRS stated: “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.”
When that notice was issued health insurance brokers all over the nation suddenly realized that one of the most useful tools we had utilized for years had been snatched away from us by an ever encroaching federal government. A federal government ruled by an administration with a never ending thirst for more ‘revenue increases’ a.k.a. tax dollars. Little did we know back in September how severe the ramifications would be for an employer who would continue to use this strategy in the future.
Even More New Rules
On May 13, 2014 the IRS clarified how stiff the penalties will be for an employer who continues to pursue the aforementioned tax and premium saving alternative. It applied the same penalties it outlined back in 2011 to any employer who ‘fails to meet certain group health plan requirements‘ under Obamacare. These fines equate to a $100 fine per day per employee. $100 a day multiplied by 365 days equals an annual fine of $36,500 per employee for each year that the employer remains out of compliance with Obamacare.
In A Nutshell
So what does this all mean in laymen terms? This means that employers can still cancel their existing employer sponsored group health insurance plans and ‘dump‘ their employees into the Obamacare exchanges. In other words, they can still provide a stipend for their employees to purchase individual health insurance either on or off the Obamacare exchanges. They just can’t do so using pre-tax dollars. Not without facing a tremendous IRS penalty.
In the end, this ruling will save taxpayers a lot of money because we won’t be subsidizing premiums for millions of employees who would normally have their health insurance paid for in part or in whole by their employer. That’s the good part. The bad part is as health insurance premiums continue to rise sharply (largely because of Obamacare) employers may be forced to react to this latest government health care scheme by terminating employment. Premiums can only rise so much until something breaks. The last thing we need is to increase our unemployment numbers which are much higher than what the Obama administration has ever reported.