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Insurance Reimbursement and Penalty


Edsel

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Just got out of a seminar - where this subject was brought up.

I have a client (a subchapter S) with a typical s. 125 plan which furnishes medical insurance along with other benefits.

However, they have one employee who pays his own insurance and the company reimburses him.  I am told they can be penalized for this to the extent of $100/day.

Can anyone provide a cite for this?  I would like to have a cite before beating up on my client.  The seminar did not provide a cite.

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Thank you Mr. Golar, and I have read Section 4980D.  I am not well trained to read Code - in this case, nowhere in plain English does it say a company cannot reimburse an employee directly for insurance payments - although it speaks of several different kinds of penalties and vague references to "failure."

Mr. Golar has provided exactly what I've asked, but can anyone else direct me to the specifics of insurance reimbursement being a violation of 4980D?

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Evan is correct, it is 4980D.

You should also read IRS Notices 2013-54 and 2015-17 that explains why the reimbursement is problematic.  This was commonplace to allow tax-free reimbursements prior to passage of ACA, but once that law went into effect these reimbursements were themselves deemed to be group plans  that may have been reimbursing premiums for health insurance that didn't meet all of the requirements of the ACA, and that is the reasoning for the penalty of up to $100 per employee per day.  The tax-free aspect also went away with the ACA, and these reimbursements would have to be included in compensation subject to payroll taxes. Your client is probably not handling that properly either.

Here are two articles that explain the problems of the old HRAs and talk about the newer QSEHRAs:

  • This one from NOLO legal encyclopedia in layman's terms that may help you.
  • And this one that also talks about QSEHRA's and has links to the two IRS notices also.

You'll have to use the second link above for the IRS notices or google those and look for the the ones that direct you to IRS.gov. They are coming up as pdf files on my tablet so I can't easily link to them here.

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