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Pre-Tax Reimbursement of Individual Premiums

The Problem

The employer who’s employee(s) purchase individual health insurance through the Covered California health insurance marketplace faces some tax consequences if he or she plans to reimburse their individual insurance premiums pre-tax via payroll. Federal regulations prohibit employers from paying directly for employee’s medical expenses, including health insurance premiums and HHS recently ruled that employees may not use their pre-tax contributions in Section 125 “Cafeteria Plans” to pay for individual health insurance premiums.

Health Reimbursement Arrangement (HRA)

The stand-alone HRA had been seen as a loophole that would allow reimbursement of subsidized employees with after-tax dollars. That loophole has apparently been closed, The Department of Labor issued a new FAQ document about the Affordable Care Act (ACA) implementation last week that clarifies that an employer-sponsored HRA may not be integrated with individual market coverage or with an employer plan that provides coverage through individual policies.

Employers who want to provide a contribution to employees for coverage in the individual exchange will do so with after-tax dollars and the employees will be taxed on the contribution as income.

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