IRS Grants Penalty Relief for Employer Reimbursement of Health Insurance

By Kenneth H. Bridges, CPA, PFS     March 2015

It is well-known that an employer can provide health insurance benefits to its employees tax-free under a group plan.  It has also long been the rule of tax law that an employer can reimburse an employee for the employee’s purchase of individual health insurance and exclude the reimbursement from the employee’s W-2 income.  However, in connection with the implementation of the Affordable Care Act, the IRS ruled that an employer’s reimbursement of an employee’s individually-owned health insurance policy premiums on a tax-free basis would result in a plan that does not satisfy the market reforms for group health plans, and therefore could mean an excise tax of $100 per day per employee for the employer.  Small businesses and nonprofits are the employers most likely to reimburse their employees for individually-owned policies, rather than having a group plan, and are also the least likely to have timely become aware of the IRS position on this matter.  Accordingly, many small businesses and nonprofits were exposed to a potentially draconian penalty and unsure of what corrective action to take.

Thankfully, the IRS has just issued a notice indicating that it will not assess the penalty against any small employer (less than 50 employees) for health insurance reimbursements which occur or occurred prior to July 1, 2015.  The notice further provides that it is not necessary to file Form 8928 (the form you file to either pay the penalty or report the failure and beg for forgiveness), and appears to make clear that you do not need to include the health insurance reimbursements in the employees’ W-2 income.

Reimbursement arrangements involving only one employee are not considered to be group plans, and thus appear to continue to be okay.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.