This question addresses what could be severe payroll implications if existing employer reimbursement practices are continued past January 1, 2014.
Question – What if I cancel our group health plan and pay for my employees’ individual insurance instead?
Answer – Beginning January 1, 2014, employers cannot reimburse employees for individual health insurance.
The reason for this is the only legitimate way to do this in the past was by offering a Health Reimbursement Arrangement (HRA) for pre-tax reimbursement of health insurance premiums. The government recently announced that employers are no longer allowed to have stand-alone HRA’s, thus eliminating the ability to reimburse employees pre-tax for individual premiums.
That being said, some employers are still considering increasing employees’ incomes to offset expenses associated with individual insurance. If an employer does this, the employer will pay increased payroll taxes not currently incurred with health insurance premiums. The employee would also have to pay tax on that income, yielding a lesser benefit. In addition, this could cause massive confusion among your employee population, and end up costing you more in the end – both from a hard dollar cost, and from a soft dollar cost in the form of recruitment and retention.