On September 13, 2013, the IRS released Notice 2013-54 which stated that employer payment plans, which previously allowed an employer to reimburse employees purchase of individual health insurance without the employee paying tax on the amount, do not satisfy the Affordable Care Act’s market reforms.  Thus, effective for 2014 plan years, employer payment plans are prohibited.

In an FAQ issued May 13, 2014, an employer utilizing these prohibited employer payment plans is subject to an excise tax of $100 per day for each applicable employee.

Employers looked to these employer payment plans to compensate employees transitioned from group coverage to individual coverage either from private insurers or the Affordable Care Act’s public exchange.  It did not take long for employers to realize it would be cheaper to provide employees a lump sum to purchase individual insurance rather than complying with the Affordable Care Act’s employer-sponsored requirements.

An employer considering dropping its employer-sponsored health insurance can still increase wages to compensate employees for the lost health insurance benefit, but employees must pay income tax on that amount.