Affordable Care Act and Health Reimbursement Arrangements
The Affordable Care Act (ACA) added new requirements for health insurance coverage. Although small employers (those with fewer than 50 full-time employees) are not required to provide health insurance coverage, there are still some rules that come into play.
Health Reimbursement Arrangements (HRA) that are not integrated with an employer group health plan are not permissible under the ACA unless the HRA applies only to excepted benefits or it caters solely to retirees. HRA's may not be integrated with plans purchased on the individual market. Additionally, ACA market reforms are violated if employers reimburse or directly pay premiums for an employee's individual health care coverage. Accordingly, employers are no longer permitted to reimburse their employees for the cost of individual coverage. An employer that does may be subject to an excise tax of $100 per day. After-tax reimbursement plans are permitted, as are plans with fewer than two participants.
A one employee business is not subject to any ACA provisions. This includes the following:
- A single S or C corp shareholder/employee
- A sole-proprietor alone or a sole-proprietor with one W-2 employee
- Any partnership/LLC with no employees or just one W-2 employee.
Reimbursements to a single shareholder (ACA provisions do NOT apply) for premiums paid can be treated as in the past. The reimbursement is reported as wages in Box 1 and Box 16 of the W-2, subject to income tax withholding but not FICA or Medicare.
However, if there is a shareholder/employee with a non-shareholder employee, the company is subject to the provisions of the ACA. This means that if the employer provided any health insurance coverage including him/her self, it must be in an ACA compliant group plan, AND the shareholder cannot be reimbursed as in the past. The reimbursement would be fully taxable (including FICA and Medicare withholding) and there is no corresponding self-employed health insurance deduction. Additionally, if the shareholder provided health insurance coverage only for themselves and not for the (full time) employee, it is discriminatory under the ACA and subject to the $100 per day penalty.
If you have any questions regarding these provisions or other aspects of the Affordable Care Act, please contact us.
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