Tax topics: straight talk on the employer-provided healthcare
The 2010 Affordable Care Act (ACA) has created havoc with the ability of small employers to assist employees with health care costs.
These new rules are effective for health plan years beginning in 2014, and the sanction, a penalty of $100 per day per employee, is so severe that all employers, even the smallest, must carefully adhere.
Employer-paid health insurance
In the past, many employers paid some or all of an employee’s individual health insurance premiums. This was a tax deduction to the employer and tax-free to the employee. But those arrangements now violate the “market reforms” of the ACA and result in the large employer penalty. This applies to all forms of employer assistance for individual premiums, even through a Sec. 125 cafeteria plan.
Going forward, pre-tax employer-provided health insurance can only be provided through a group policy that meets the many ACA mandates. In general, this will mean higher premiums. Employers may want to consider a high-deductible policy (at least $1,250 deductible for self-only coverage or $2,500 for family coverage—2014 amounts). This type of policy allows a separate pre-tax Health Savings Account or HSA. The HSA can be funded by the employee, employer, or both, up to $3,300 per year for self-only coverage and $6,550 for family coverage. HSA funds are then used to reimburse out-of-pocket medical costs, but not premium payments.
Employer medical reimbursement plans
Many small employers have used Section 105 medical reimbursement plans or Health Reimbursement Arrangements (HRAs) to subsidize employee health care costs. Unfortunately, for businesses with two or more employees, these are now generally prohibited because they violate the ACA mandates. There are, how ever, a handful of exceptions where these Section 105 plans are permitted:
• A one-employee plan. Because 105 plans must be offered in a nondiscriminatory manner, this solution is limited to employers with only one full-time employee.
• Ancillary benefits plans. 105 plans limited to reimbursing dental and vision coverage, long-term care costs and disability coverage are permitted, because these are not part of essential health care benefits under the ACA.
• Integrated 105 plans. An employer reimbursement plan that is integrated with an ACA-approved group health plan is permitted, assuming that each participant in the medical reimbursement plan is enrolled in a group health insurance plan.
• Retiree-only plans. Employers may provide a reimbursement plan if it is limited to retirees only.
Employee premium payments
In general, when an individual pays health insurance, it is only deductible if the sum of medical costs exceeds 10 percent of Form 1040 page one income. This is a high hurdle, and essentially makes individually paid premiums nondeductible. However, farm proprietors, partners, and more-than-2 percent S corporation shareholders are eligible for the self-employed health insurance premium deduction, allowing a page 1 Form 1040 deduction.
Employee out-of-pocket costs
The best option remaining, beginning in 2014, as noted earlier, may be the use of a high-deductible health policy with a pre-tax Health Savings Account or HSA. To the extent not drawn out for reimbursement of current health costs, the HSA amounts can be accumulated and carried forward indefinitely. — Andy Biebl, DTN Tax Columnist