If you are planning to reimburse your employees for their cost of individual insurance, be careful! You may violate the Affordable Care Act (ACA) even if you classify the reimbursements as fully taxable wages.
This is part of the government's push to stop employer reimbursement of individual insurance policies. The government imposes a $100-a-day penalty ($36,500 a year) per employee violations. Basically, the government wants you as a small business to either offer group health insurance or offer no insurance benefit at all.
However, you can still increase employee salaries to help them pay for individual health insurance, but you have to do it the smart way. What this means is you must not tie the wage increase too closely to the cost of insurance premiums.
Here’s an example of how you can get yourself in trouble: You have multiple employees, and you tell your employees that you will increase their salaries on the condition that they submit a receipt for their health insurance. Your employees submit receipts, and you increase their taxable compensation by the amount they spent.
In this example, you violate the ACA rule on reimbursements. It doesn't matter that your employees choose their own policies without your intervention or direction. And it doesn't matter that the law requires your employees to own health insurance of some kind, even if they do not qualify for the individual tax credit or employer assistance. The IRS says that your reimbursement is too closely connected to the purchase of insurance and thus violates the ACA.
If you have multiple employees and you want to reimburse them for their individual insurance policies, you can still increase their taxable wages to do so. However, you cannot link or condition this salary increase to health insurance reimbursement.
The simple way to comply with the law is to increase your employees' salaries by a flat amount. You do not have to give all of your employees a raise, and you can give different raises to different employees-just remember that you want to state a reason for the raise that does not relate to the purchase of insurance.
Here’s an example that works under ACA: You have two employees. You increase the salary of each employee by $5,000, knowing that the employees will use the extra money to purchase health insurance for themselves and their families. However, you do not condition the salary increase on the purchase of insurance, and you do not require them to give you receipts for their insurance purchase. The salary increases comply with the ACA rules.
One Employee Rule: If you have only one employee, then you are exempt from the ACA rules on healthcare reimbursements.
S-Corporation Owners: If you operate your business as an S corporation, your S corporation treats its health insurance payment or reimbursement as taxable compensation to you, the owner. Recent IRS guidance states that S corporation owners are exempt from this reimbursement rule.
Family Businesses: The IRS also clarified an important question with regard to businesses that employ spouses and children. The IRS counts everyone covered by the same family policy as a single employee.
Example. You own a C corporation that employs you, your spouse, and your 19-year-old son. You purchase one family policy on the individual market that covers you and the other two members of your family. According to the IRS, this is a single-employee plan that is exempt from the ACA reforms.