Q&A with Alison M. Howard
IRS health coverage ruling helps protect from employer dumping
Q: What is employer dumping, and why might the IRS have been concerned?
A: Starting in 2015, the Affordable Care Act (ACA) will require large employers (those with 50 or more full-time employees) to offer health coverage to all of their employees or pay a nonprovision penalty of up to $2,000 per employee per year. Many employers already sponsor health coverage and make significant contributions to the cost of coverage that aren’t taxable to employees. Apparently, in response to the ACA mandate, and in an attempt to shift health costs to the government, some employers had planned to forgo providing health coverage, accept the penalty and encourage employees to obtain individual health insurance through an exchange with the carrot of a tax-free reimbursement of some or all of the premium costs. There was concern that this dumping into exchanges would erode the employer-based health system upon which the ACA is founded.
Q: How does the new IRS ruling prevent employer dumping?
A: The ruling deincentivizes employers from sending employees to exchanges, rather than providing employer-sponsored health coverage, by penalizing an employer for making tax-free payments to employees to cover the cost of insurance obtained through an exchange. This payment arrangement, described as an employer payment plan, is deemed a group health plan. As such, the arrangement necessarily fails to satisfy ACA requirements since it can’t piggyback on the individual insurance obtained through the exchange to meet ACA standards. Accordingly, such a plan could be subject to a noncompliance excise tax of up to $100 per day per employee ($36,500 per year), which is even higher than the nonprovision penalty.