ACA penalties involving medical reimbursement plan

The IRS is cracking down on employers who offer a medical reimbursement plan to employees enrolled in individual (non-group) health plans. Don’t let your business fall victim to costly ACA penalties. Read through our tips below to learn how you can help your business stay compliant with the new healthcare laws and regulations.

(See Related: ACA Compliance Solutions)

ACA Penalties- Employee Excise Tax

As of July 1, 2015, employers who offer a medical reimbursement plan to their employees could face a new ACA penalty that charges $100 per day, or $36,500 a year, per employee. Called the Employee Excise Tax, this new rules applies to all employees under the Affordable Care Act, and the fine applies to companies with 50 or more Full-Time Equivalent (FTE) employees.

Although the ACA penalties are primarily designed for larger companies, small businesses with more than 2 and less than 50 FTE employees are not always exempt from the tax, depending on how their medical reimbursement plan is set up.

Medical Reimbursement Plan

Peo Insurance benefits available to clientsA medical reimbursement plan is when an employer pays back an employee for out-of-pocket health expenses up to the maximum dollar amount for a covered period. Generally, these are tax-free plans and are covered under Internal Revenue Code Section 105. However, employers must ensure these plans are carefully created and executed to avoid ACA penalties.

In May 2015, the IRS released a technical guide that warns employers that these medical reimbursement plans may not satisfy the requirements under ACA and could create a problem of “double dipping” if the employee is using the reimbursement to purchase insurance from The Marketplace.

Avoid Double Dipping

Double dipping is when both employers and employees are receiving tax benefits for the same dollar. In regard to medical reimbursement plans, this applies when employers are getting tax benefits via HRA while employees are using the tax credits through the Marketplace to supplement their premiums.

In short, the employer is benefiting by getting a tax credit for supplying the reimbursement, and the employee benefitting by taking that money and using it to purchase insurance from The Marketplace.

PEO Health Benefits & Medical Reimbursement Plan Solutions

PEO benefits of ACA compliance solutionsFor most employers, the best strategy for avoiding ACA penalties and fines is to offer a group health program to all qualified employees. Small employers may use the SHOP marketplace to obtain coverage. Large employers with 50 or more FTE employees must purchase a group plan from the standard market.

If you find the coverage offered through either SHOP or the standard market is still too costly for your business, we recommend you consider taking advantage of the PEO health benefits offered by American Employer Group.

To learn more about compliance and how to avoid ACA penalties, download our ACA Facts Sheet. You can also contact our Human Resources Department at