The Affordable Care Act, commonly known as “Obamacare,” changes tax liability for employees who receive additional income to pay for individual health insurance coverage.
“For many years, the IRS permitted employers to reimburse employees for their individual health insurance premiums, and permitted employees to treat those reimbursements as tax free. The new health care reform law changes all that,” says Kevin Paul, an attorney with Heizer/Paul LLP, based in Denver.
“Under the new health care reform law, employers cannot give employees extra pay to cover the cost of individual health insurance policies unless the employees declare the extra money as wages and pay taxes on it.
“Now, if an employer makes an additional payment to an employee, the employer and the employee have to pay taxes on that amount, even if the employee uses the extra money to buy his own health insurance,” says Paul.
Obamacare also prohibits employees from using Section 125 ‘cafeteria plan’ funds to pay for individual health insurance, though they can use them to pay their share of group health premiums, notes Paul.
Under the new health care reform law, smaller employers have two options if they want to help their employees obtain health insurance, he says.
“First, employers can buy a group health insurance plan that covers all of their employees who meet the plan eligibility requirements and want to enroll. The employer can then require employees to pay part of the cost of their coverage. The employees can do this with pre-tax dollars.
“Second, an employer can ‘gross up’ an employee’s taxable wages, so the employee has more after-tax money available to use for his own, individual health insurance policy. Neither the employer nor the employee receives any tax benefit for doing this, and the employee cannot be required to use the extra dollars for health insurance. Nevertheless, it’s a way for a smaller employer to assist without taking on the cost of a group health insurance plan,” says Paul.