The Threat of Moving Employer Sponsored Health Insurance To Exchanges
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New IRS Penalties Prohibit Cost-Conscious Employers from Shifting Workers to Public Health Insurance Exchanges

By Ashley Kaplan on 8/4/2015
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As businesses wrestle with the specifics of the Affordable Care Act and the rising costs of health care, the possibility of employers “dumping” employees from their group insurance plans to the health insurance exchanges began to emerge.

The idea was this: Companies would cut costs by shifting workers – especially those with high medical costs – from their group health plans to the public insurance exchanges created by the ACA. To facilitate the move, they would give employees a tax-free contribution to pay some or all of their insurance premiums in the marketplace – an expense that would be cheaper than providing coverage directly, which averages $5,000 a year per employee.

The Obama administration has stepped in, however, and determined that such an arrangement violates the federal health care law.

Under a new IRS ruling, employers would be subject to a tax penalty of $100 a day – or $36,500 a year – for each employee affected.

The ACA already mandates that employers with 50 to 99 full-time employees provide health insurance by 2016 or risk a penalty for non-compliance. The recently approved $100-a-day-excise tax would be a separate penalty against employers who break the rules pertaining to tax-free contributions.

The concept of employers assisting employees by reimbursing them for health insurance premiums – commonly referred to as employer payment plans – is not new. In fact, it preceded Obamacare. What is new, however, are the requirements of the ACA and IRS Notice 2013-54, which prohibit employers from shifting health care costs to the government by offering employees tax-free contributions to move to health insurance exchanges.

Tax-free is a key phrase here.

Although there’s some confusion around the ruling, it should be noted that it doesn’t prevent employers from providing funds to employees to purchase health insurance on the exchanges. Rather, it restricts the use of tax-free dollars. (For example, an employer could increase wages to help employees buy insurance on their own, but the additional income would be taxable.) From that perspective, the IRS is reducing the incentive for employers subject to the Obamacare employer mandate to move employees to the exchanges instead of providing coverage directly.

Further still, the latest ruling supports the intent of the Affordable Care Act to build on the current system of employer-based health insurance, where businesses continue to provide coverage to workers and their families.

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