open enrollment and health care costsFor many of our members, health insurance is a necessary headache and a large expense that seems to grow more complicated every year. And yet it is also one of the most important incentives you can offer to attract top-notch candidates to your team. Thus, many employers are understandably attracted to the idea of giving money or a stipend directly to employees to help them defray the costs of buying their own individual plans.

This sounds ideal, because your employee gets the coverage they want and may be eligible for tax credits if they go through the Exchange, while you avoid the costs of a true group health plan. But wait – there’s a big problem here!

Based on a recent clarification by the IRS, such a reimbursement plan would violate the Affordable Care Act (“ACA” or “Obamacare”), even if the company has less than 50 employees. Because such a plan cannot be integrated with the ACA’s prohibition on annual dollar limits, the plan would fail, and would subject the employer to fines that are prohibitively expensive, including $100/day/employee.

This means that having one employee under this plan could expose an employer to $36,500 in liability per year – not including other fines that apply if the employer has over 50 employees!

Thankfully, the fix is relatively easy.  You have two options.

  1. The first (and best) option is to switch to a valid employer health plan. Once compliant, the threat of harsh penalties goes away, AND you get to attract better candidates for hire with your benefits package. Small business owners can search for affordable group plans at the SHOP marketplace, which can be found at www.HealthCare.gov.

    Many small businesses will also be eligible for valuable tax credits to help defer your costs of offering this benefit. To qualify, you must have fewer than 25 full-time-equivalent employees, and have an average annual wage of less than $50,000. If you don’t meet these qualifications, you are better off consulting a licensed insurance broker to find the best plan.

  2. If you are still shy of offering your own plan, and you have less than 50 employees, you can still offer a type of stipend or bonus to help offset your employee’s healthcare costs. There are two rules, however, to do this without liability:

    • The extra compensation must be offered on a post-tax basis; and
    • You cannot condition payment upon proof of individual coverage.

    Essentially, the stipend is added taxable compensation that is listed separately on the paystub to help differentiate from the rest of compensation.

  3. However, there are two downsides to offsetting employees’ healthcare costs in this way.

    First, employees may initially understand this as a type of health benefit, but over time, may come to think of the money as part of their wages instead. This can lead to a disgruntled workforce that demands more healthcare benefits.

    Secondly, if you add to compensation, you also add to your overtime costs, as the added compensation must be included in the calculation of the overtime rate of pay.

    As you can see, providing a healthcare reimbursement or stipend is not the easy answer some are chalking it up to be.

    Need help or have follow-up questions? Members may call 866-414-6056 or email us at info@cedrsolutions.com to speak with an advisor.