The IRS has warned of costly consequences to an employer that doesn’t establish a health insurance plan for its employees, but reimburses them for premiums they pay for health insurance. It’s an attractive option on the surface – avoiding establishing a costly group health plan while providing your employees the means to buy their own insurance.  But it has hit a major snag.

According to the IRS, these arrangements are considered to be group health plans subject to the market reforms of the Affordable Care Act. These reforms include the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Simply giving your employees the money to buy their own individual policies doesn’t mean you’ve cleared this hurdle.

Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee. That money adds up quickly.  The best thing to do is to reach out to a well qualified insurance professional to determine what, if any, coverage you are required to provide and whether what you’re currently doing will meet those obligations.