Question: My boss had said that I could pick an individual health insurance plan and he would pay the premium, but his accountant told that there were tax penalties for doing that. Is that true?
Answer: Yes. Paying for your individual health insurance will put your employer out of compliance with federal regulations and increase the company’s tax liability and your’s also. There are two major reasons an employer should never pay for its employee’s individual health insurance plan:
- Federal Compliance Issues - Paying for Individual Health Insurance without a HRA Plan Causes the Employer to “Endorse” the Individual Health Insurance Plans
- Increased Tax Liability - Paying for Individual Health Insurance without an HRA Plan Causes the Payments to Become Taxable Income to the Employees.
When an employer pays directly for an individual health insurance plan, they effectively endorse each employee’s individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans, do not meet minimum ERISA group plan requirements, the employer is out of compliance.
Separately, an employer is not allowed to know the details of employees HIPAA-protected medical expenses. Because most individual health insurance costs are based on an employee’s health, the health insurance details must be HIPAA protected. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.
The federal government has guidelines for employers who want to contribute to employee’s individual health insurance premiums without violating the HIPAA and ERISA regulations. An ERISA and HIPAA-compliant HRA health plan will ensure compliance with federal law. The IRS requires that legal plan documents be established in order for employees to deduct the individual health insurance premiums from taxable income on the annual W-2. An IRS-compliant HRA plan will ensure the tax deductibility of employee’s individual health insurance premiums as well.