The guidelines follow discussion of whether employers will stop offering job-based health benefits and shift workers onto the exchanges by offering to pay part of their premiums. That could hike the federal cost of premium subsidies, though the penalties imposed on employers under the Patient Protection and Affordable Care Act for not offering affordable coverage could offset costs.
Employers receive tax deductions for the amount they pay for employees' healthcare premiums, whether or not they directly provide coverage. Those payments do not count toward employees' taxable income. But employees may not realize that a company's offer to pay part of their premium for individual coverage on the exchanges is treated for tax purposes the same as if the employer had directly provided group coverage, said Catherine Livingston, a partner at Jones Day and the IRS' former lead attorney on healthcare reform.
The result is that people might inaccurately claim on an application for an exchange health plan that their employer does not offer coverage and receive subsidized coverage on the exchange. “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.
That mistake could trigger the big penalty against the company, unless the employer can convince the IRS through an appeal that the subsidy was made in error. Then the IRS could require the employee to pay back the subsidy.
Corporate tax consultants have been hunting for ways to combine the tax breaks for employer benefit plans with the premium tax credits available to lower- and moderate-income individuals for buying exchange coverage, said Joel Ario, a managing director at Manatt Health Solutions and a former HHS official who led development of state insurance exchanges. “That's what the IRS is trying to prevent,” he said.
Ario said that if companies want to help employees buy coverage on the exchanges, they can raise their salary. But such increases are subject to employer and employee payroll taxes, which makes that approach less attractive.
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