June 18th, 2014 – Employers using pre-tax money for the purchase individual health has been a gray area for some, with it being in compliance with Colorado laws, but prohibited by Federal regulations.
The IRS has cleared things with a new ruling that makes clear that this practice is not allowable. The IRS’s new ruling prohibits employers from providing pre-tax money to their employees to use for the purchase of individual major health insurance, even with a defined contribution plan.
The intent of the ruling is keep employers from giving workers tax-free dollars to buy individual health insurance policies either off-exchange or through Connect for Health Colorado and other public exchanges. They do not wish to destabilize employer sponsored group health insurance.
However, nothing in the ruling will stop companies from dropping employer sponsored group plans and leaving employees to buy individual policies, so long as the employer pays the relevant taxes and penalties. Employees could then use taxable income to purchase the policies and may be eligible for federal subsidies to reduce their out of pocket premium costs.
Companies with fewer than 50 workers are not subject to any penalty under the health law for dropping coverage or never offering it. However, in 2016 employers with 50 to 99 workers that don’t offer coverage may be liable for significant fines. Firms with over 100 workers are required to offer health insurance coverage to employees beginning Jan. 1, 2015, but must only cover 70% of those workers in 2015. They will be required to offer coverage to 95% of their workers in 2016 and in subsequent years.
For those companies who continue to offer employer sponsored group health insurance plans, employers can continue to deduct the portion that employers pay and the group benefits are still not taxable to the employee. Also, employees can continue pay their portion of their group health insurance premium with pre-tax funds.