Employers will not remain in compliance with the 2010 healthcare reform law if they replace their insurance coverage with subsidies for insurance bought through new government-run marketplaces, the IRS recently warned.

The IRS ruling that employers will face fines through the Affordable Care Act (ACA) if they switch from offering coverage to providing subsidies effectively prevents employers from “dumping” their employees into the new health exchanges rather than providing workers with health coverage, according to media reports.

The announcement, which came through an answer to a question posted this month on the IRS website, sought to address the question, “What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?”

The response from the IRS underscored a November 2013 IRS notice that described such employer subsidy arrangements as employer payment plans and stated that employers cannot apply after-tax funds toward health coverage or reimburse substantiated premiums with cash compensation. Employers choosing to take an employer-payment-plan approach rather than offering employees health insurance could face penalties of up to $100 per day per employee.

The November notice stated that “these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.”

The November notice also explained that the ACA provisions also applied to some types of group health plans, including health reimbursement arrangements, health flexible spending arrangements, and certain other employer healthcare arrangements.

The Labor Department also issued a similar notice in September 2013.

The U.S. Department of Health and Human Services (HHS) plans to issue guidance “soon” regarding the issue, according to the IRS.

Various ACA health reimbursement arrangements were addressed in series of FAQs issued in January 2013 by HHS and the Labor Department.

Publication Date: Tuesday, May 27, 2014