…when the Employer reimburses the Employee for health insurance costs

This is not a joke.  It is from IRS Notice 2013-54, in reference to a long-held practice whereby employers could simply reimburse employees for health insurance secured directly by the employees.  Prior to 2014, such an arrangement was an acceptable alternative for smaller employers for whom group coverage was impractical.  The employee secured the insurance and the employer either paid the premiums directly, or reimbursed the employee for the premiums.

The tax consequences were favorable.  The employer got a deduction just as if it were regular group health insurance, but the employee did not recognize income.  (A similarly beneficial arrangement was in place for S-Corp owners.)

But Notice 2013-54 changes all that.  The interpretation is that such an arrangement does not satisfy market reforms initiated by the Affordable Care Act, aka Obamacare.  Now, beginning January 1, 2014, if employees pay their own insurance, and the employer reimburses them, the employer is subject to a fine of $100 per day.  This is true even if the employer pays the premium directly.

This means, under the ACA, either the health insurance is a group plan directly arranged by the employer, or it is a personal plan arranged by the employee.  No more sharing.

The only way for the employer to continue to contribute to the employee’s health insurance costs is to give the employee a raise, but not require that the increased pay be used to pay for health insurance.  In other words, if the employer was paying $1200/month toward the employee-paid premiums, the employer could now increase the employee’s monthly wage income by that same $1200.  Of course, the $1200 is subject to federal and state income taxes, as well as social security, medicare, and various state unemployment/disability/etc. taxes.  This means, in order for the employee to get the full $1200, the amount would need to be grossed up.  Grossed up by how much?  Depends on the actual salary of the particular employee.  Thus, two taxpayers with identical single plans from the same insurer, but different base salaries, could need different amounts to fully cover their premium without dipping into their regular income.

The next hurdle: the employer has to pay the employer share of social security, medicare, and state unemployment/disability/etc., as well as FUTA on the former monthly health insurance premium.  Sure, it’s all deductible to the employer, but without question, it’s a whole lot more than it was before health care reform.

The point, of course, is to stop people from buying individual coverage, and drive them into the “marketplace.”  Why?  According to early projections, the new system needs 21 million subscribers in order to break even.  This 21 million was supposed to be made up of both old and/or sick people and young and/or healthy people.  Currently, after 2 years, the system is expected to reach only 10 million subscribers.  This current 10 million is basically made up of old and/or sick people.

You do the math.  Personal opinions withheld.