Some employers thought they’d found a smart way to deal with Obamacare: Give employees a tax-free stipend to buy health insurance on the public exchange.
The Internal Revenue Service, however, just put the kibosh on that plan.
A new IRS rule bans employers from “dumping” their employees on the health insurance exchanges through a common arrangement called employer payment plans, according to The New York Times. The Obama administration clearly saw the writing on the wall: More companies have considered dropping their employer-sponsored health coverage due to Obamacare and requiring employees to buy coverage on their own—and it wanted to nip that practice in the bud.
To be clear: The new rule doesn’t prohibit employers from giving their employees stipends to pay for health insurance. It just prohibits them from using after-tax dollars to pay for it. (Vox.com offers a helpful Q&A about the new federal rule.)
Employers who break the new rule may face hefty tax penalties of $100 a day—or $36,500 a year—for each employee who loses health insurance and is sent to the exchange, according to an IRS Q&A.
Some recent reports have predicted that many employers subject to the Obamacare employer mandate would drop their health insurance and send employees to the exchange. This rule makes that option far less attractive.
Some employers have used the tax-free lump-sum model of providing employees health insurance for many years, so the new IRS rule also effectively means those plans are not compliant with Obamacare and those employers will either need to buy workers health insurance or pay a fine.
“For decades, employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs,” Andrew Biebl, a tax partner at Minneapolis- based tax firm CliftonLarsonAllen told the Times. “The new federal ruling eliminates many of those arrangements by imposing an unusually punitive penalty.”
The new ruling also suggests that Obama isn’t so keen on moving away from an employer-based health insurance system after all. Some health policies experts have speculated that the delay of Obamacare’s employer mandate suggested the president hoped to steer the United States away from employer-sponsored coverage and toward one where individuals are responsible for buying their own health insurance—a move some health policy experts support.
But this rule clearly aims to ensure businesses continue to buy their workers health insurance and stops employers from seeking more-affordable alternatives for dealing with Obamacare.
Read more small-business news.
Photo: Getty Images