Since the implementation of the Affordable Care Act, many small businesses have been intrigued by the possibility that they might be able to stop dealing with health insurance entirely and instead offer their employees a stipend to go buy insurance on the individual exchanges. But in a clarification issued in early November, the federal government appears to have taken a stand against that strategy.
There had been little doubt among most lawyers who follow the tax implications of the Affordable Care Act that a company would not be able to subsidize its employees’ individual health insurance with pretax dollars (the way that premiums for group health insurance are excluded from an employee’s income). But as we reported a few weeks ago, the government’s guidance on using post-tax compensation was murkier. With its recent statement, the government removed some — though not all — of that ambiguity.
The additional clarity came in the form of a “frequently asked questions” document issued by the Department of Labor. Even now, however, the issues remain complex and open to interpretation, and the tax and benefits lawyers contacted by You’re the Boss offered differing perspectives on the Labor Department’s answers. What better way to try to make sense of these issues than to borrow a trope from the government and present them in the form of an FAQ.
Businesses with plans that violate the health law’s market rules can face penalties of up to $36,500 a year for each affected employee.
Up until now, there had been a debate among lawyers about whether a company could expressly reimburse individual insurance premiums with taxable income, or, if not, condition the additional compensation on buying insurance — even if the money is not tied directly to the cost of premiums. But the latest advice from the Labor Department should end those arguments, according to four of five lawyers contacted by You’re the Boss.
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Jeffrey R. Ungvary President