IRS Provides Limited Penalty Relief for Some Small Employers That Pay Employees’ Individual Health Insurance Premiums

March 3, 2015|James Derzon

If you’re a small employer that generally employs less than 50 full-time employees (or the equivalent of less than 50 full-time employees), and if you pay or paid some or all of your employees’ individual health insurance premiums after 2013, here’s some good news – but first, a little background is in order.


In September 2013, the IRS indicated that the long-established practice of an employer paying for some or all of an employee’s individual health insurance premiums constituted an “employer payment plan” that did not comply with the Affordable Care Act’s market reforms.

Therefore, an employer that paid these premiums or specifically reimbursed these premiums (regardless of how the employer’s payments were treated for income tax purposes) was subject to a penalty equal to $100/day per affected employee.

Note that it’s OK for an employer to increase salaries so that employees will have more money to pay for their health insurance as long as the employees are not required to get health insurance and can spend the extra cash any way they want.

The market reforms do not apply to plans with less than 2 participants who are current employees at the beginning of the plan year. Therefore, plans with only 1 employee participant are free to reimburse the employee’s individual health insurance premiums and will not incur a penalty.

Retiree plans are exempt from the market reforms as a retiree plan does not include any participants that are current employees.

Penalty relief (includes Medicare premiums)

The IRS now states that these small employers won’t be subject to the $100/day (or $36,500/year) per employee penalty for paying or reimbursing individual health insurance policy premiums – or Medicare part B or part D premiums – during the period of January 1, 2014, through June 30, 2015.

Special Medicare rules

The IRS indicates that it’s possible for an employer to reimburse Medicare premiums without any penalty exposure if its arrangement is properly integrated with its group health plan. However, if the arrangement covers less than 2 participants who are current employees on the first day of a plan year or a retiree-only plan, it’s not subject to penalties and integration is not necessary.

Please contact us if you have any questions about employer payment plans or about integrating a Medicare reimbursement arrangement with your employer’s group health plan.

Jim Derzon, CPA, is an employee ­benefits specialist for our firm on technical matters ­pertaining to retirement plans and employee benefits. Jim works in these areas with our clients, large and small. He has extensive experience in both industry and public accounting.