Rather than set up group health insurance plans, some small employers have traditionally had the option of a medical reimbursement plan which could be used to reimburse employees for the health insurance premiums they incurred on their individual health policies. Such medical reimbursement plans have not been forbidden per se, but the reimbursement of individual health insurance premiums by such plans has been forbidden.
An arrangement whereby the employer reimburses the employee for individual health insurance premiums is referred to as an "employer payment plan." Whether a particular brand of health plan is subject to the market reform provisions of the Affordable Care Act depends on whether the plan meets the definition of a "group health plan." IRS has ruled that the employer payment plans are indeed group health plans, and thus are subject to market reforms. The why and how of the conflict between the market reforms and such employer payment plans is explained, but it takes a familiarity with the jargon of the legislation that frankly I don't possess. (Something to do with integration.)
The Penalty
If an employer runs afoul of this prohibition, the penalty amounts to $ 100 per day per employee for every day the employer maintains such a plan, beginning on July 1, 2015. Hence the timing of this post.
But that might not be the end of it as there could also be ERISA to deal with and I won't even go there.
Limited Relief
There is limited relief from this prohibition on reimbursing individual health insurance premiums. Market reforms do not have to be satisfied by such small employers if the reimbursement arrangement covers only a single employee on the first day of the plan year, or if the arrangement is maintained by an S corporation for the benefit of a 2% shareholder-employee.
These limited relief provisions are set to extend until the end of 2015. By that time, IRS expects to have considered whether additional guidance is needed. (You think?)
The Takeaway
The Affordable Care Act does a lot of good for some people. Everybody should be able to buy affordable health insurance. The provisions which mandate individual coverage are intended to stop people without coverage from getting free healthcare in hospital emergency rooms where they can't be turned away and run up the cost of health insurance for everybody else. I am for that.
However, some of the provisions of the Act do not make sense and for that reason, maybe it tries to do too much or tries to do it in the wrong way. This penalty provision is a real stinker.
