Affordable Care Act Exchanges Reimbursements

Affordable Care Act Exchanges Reimbursements: A discussion of employee reimbursements for Affordable Care Act (ACA) exchanges

Can employers reimburse employees for coverage purchased on the Affordable Care Act (ACA) exchanges?  Prior to December 31, 2013, some employers were able to provide health insurance by reimbursing their employees for their own individual, non-group, health insurance on a pre-tax or tax-free basis.  Termed as a “defined contribution health plan,” this was allowed prior to this year, however, it is now prohibited.

Before 2014, the Internal Revenue Service had long-established rules that permitted individual health insurance premium reimbursement by employers.  The earliest such mention is IRS Revenue Ruling 61-146 stating that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code § 106.

Using both health reimbursement arrangements (HRAs) and premium reimbursement accounts (PRAs), employers were permitted to reimburse their employees for non-group or individual health insurance premiums on a pre-tax (if employee was contributing to a PRA) or tax-free basis.

By relying on these two vehicles, employers could deduct any money they contributed to their employees’ health insurance premium cost as a business expense under IRC Section 152.

When the ACA was adopted, it included various provisions that many saw as efforts to stop these reimbursement approaches beginning in 2014.

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