IRS moves against double-dipping on tax perks for health insurance

The Internal Revenue Service is threatening massive fines against companies that offer employees tax-advantaged money to help them buy federally subsidized health plans on the Obamacare insurance exchanges.

Companies engaged in this kind of double-dipping face penalties of up to $36,500 per worker, recent IRS guidelines say. The penalty is so high that it has led to speculation that it could discourage companies from intentionally shifting workers onto the insurance exchanges.

Corporations get tax deductions for paying employees' healthcare premiums. But employees may not know that a company's offer to pay part of their premium for individual coverage on an insurance exchange is treated for tax purposes the same as if the employer had offered traditional group coverage.

While the intent of the new rules might be clear to companies, it may not be to employees, said Catherine Livingston, a partner at Jones Day and the IRS' former lead attorney on healthcare reform.

A worker could claim on an insurance application that their employer didn't offer insurance coverage, when in fact that's not technically true under tax law. “They will believe in good faith that they are answering questions on the application honestly, and it is only going to come to light when they file their tax return,” Livingston said.

The need for the new IRS rules came about because tax consultants have been aggressively hunting for ways to combine the tax write-offs that come with traditional group coverage with the federal subsidies available to buy individual coverage through an insurance exchange, said Joel Ario, a managing director at Manatt Health Solutions and a former HHS director over insurance exchanges.

“There are two mutually exclusive worlds, and there are people who keep trying to figure out how to use money from one in the other,” Ario said. “That's what the IRS is trying to prevent.”

Families buying coverage on an exchange can qualify for federal subsidies via federal premium tax credits if their income is between 138% and 400% of the federal poverty level. The sliding-scale subsidies shrink as family income rises. The subsidies are not available to anyone whose employer offers group coverage that meets minimum essential standards.

Companies lately have been asking whether they can move some workers—especially those with high medical costs—to the insurance exchanges. That has prompted questions about how the companies could help pay for workers' shift to an exchange plan.

“If they want to help their employees purchase insurance coverage, they can raise their salaries. But they can't tell them they have to use the money to buy healthcare,” Ario said.

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