IMPORTANT: This change applies to employers who pay individual health insurance policy premiums for employees or allow employees to pay those premiums pre-tax via payroll deduction. Employers who sponsor group health insurance policies are NOT affected by this rule.

Effective for plan years beginning on or after January 1, 2014, an employer can no longer reimburse or directly pay individual health insurance policy premiums on a pre-tax basis. Additionally, employees can no longer pay for their individual insurance premiums pre-tax via a cafeteria plan. This is not a change in tax law. A subtle rule in the Patient Protection and Affordable Care Act (PPACA) is driving the change.

To summarize the change:

• If employers pay these types of premiums directly or reimburse employees for individual insurance policy premiums, employers will need to include that payment in the employees' compensation as fully taxable wages.
• If employees have the cost of their individual policy premium withheld from their paychecks, that premium will need to be a post-tax deduction - not a pre-tax deduction.
• If so far in 2014 any individual health insurance policy premium has been withheld pre-tax, modifications should be made in the payroll system to tax those amounts as soon as possible.
• EXCEPTIONS: There are some very limited exceptions to this general rule such as if only one employee is involved or if the outside insurance is a group plan (e.g. medicare or supplemental policy).

Nothing in this rule affects group health insurance.

Please contact Matthew Folz, CPA, Michael Vogel, CPA, or Michele Graham, CPA at 800.880.7800 if you would like to discuss this in more detail or if you need any assistance in determining next steps, if this change impacts your current practices.