IRS Will Levy Fines Against Employers Shifting Workers to Exchanges

Large employers that decide to shift workers into the Affordable Care Act's exchanges with a tax-free cash contribution to offset the premiums of that coverage could face a daily tax penalty for each worker, according to guidelines in a new question-and-answer document released by the Internal Revenue Service, the New York Times reports.

Under the ACA, most employers are required to offer affordable health coverage options to all full-time workers or face penalties under the law's employer mandate.  According to the Times, some employers have determined that it would be more cost effective to provide non-taxable contributions to purchase private coverage instead of offering employer-sponsored coverage.

However, IRS noted that such an arrangement does not comply with the ACA's requirements and that employers could face a tax penalty of $100 per day, or about $36,500 per year, for each employee who is directed to purchase coverage through an exchange.

Specifically, IRS said that employer payment plans -- in which employers reimburse employees for premiums -- are "considered to be group health plans." Such plans are insufficient under the ACA because they do not meet the law's provisions prohibiting insurers from capping benefits and requiring that they provide certain preventive services without co-payments.

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Christopher Condeluci, a former tax and benefits adviser to the Senate Finance Committee, said that an employer could direct a worker to the exchanges to purchase private coverage if it is willing to increase the worker's pay, in the form of taxable wages. However, both the employer and worker would be subject to payroll taxes on those wages, which some workers might consider as reducing a valuable benefit.

Meanwhile, Andrew Biebl, a tax partner at CliftonLarsonAllen, said the IRS ruling could disrupt many industry arrangements between employers and workers. Bieble said, "For decades, employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs," adding, "The new federal ruling eliminates many of those arrangements by imposing an unusually punitive penalty" (Pear, New York Times, 5/25).