What Obamacare Means for Employers That Give Extra BenefitsBy
Question: We offer health benefits to our 13 full-time employees, with no employer contribution, as a rule. However, for 15 years, we have contributed a portion to one employee’s health insurance for her child. Will there be a problem continuing to do so under Obamacare, or are we required to offer the same contribution to all?
Answer: Interesting question. First, let’s restate that since you have fewer than 50 full-time employees, you are not mandated to offer insurance to your employees now and will not be in future. (Larger employers were to be fined for not offering coverage starting in 2014, but that penalty has recently been delayed; it is now set to begin in 2015.)
Now to your question about providing a benefit to one employee that your other employees do not get: In general, you can’t discriminate in providing health care or retirement benefits to your employees. Specifically, the answer may depend on what kind of employee is getting the benefit.
That’s because under Internal Revenue Service law dating back to 1981 (tax code section 105(h)), employers have been prohibited from discriminating in favor of their highly compensated employees under self-insured group health plan offerings. The definition of “highly compensated” in this case is an employee who holds more than a certain percentage of company stock; is one of its highest-paid officers; or gets a salary in the top 25 percent of all the company’s employees, says Garrett Fenton, an attorney specializing in health care at the Washington law firm Miller & Chevalier.
What the Affordable Care Act did was extend that non-discrimination provision—which previously applied only to self-funded insurance plans—to cover fully insured health plans as well, which are more likely to be offered by small and midsized employers. “Expanding the scope of these existing regulations had the potential advantage of standardizing rules already in place and eliminating the application of two sets of rules,” says Lori Loridon, director of research and development at Sage Employer Solutions, a human resources software provider.
If the employee who gets an extra benefit fits the definition of highly compensated, you probably had no problem in the past because you are not using a self-funded plan, which is more common among larger employers. Even in the self-funded category, and under rules that had been in place for years, the IRS had not fully drafted all the regulations and was lax in its enforcement of section 105(h), Loridon says.
The penalty for discrimination under the old rules was not imposed on the employer; it was imposed on the highly compensated individuals, making their excess health benefits subject to taxation. That often did not amount to a large sum, Fenton says, so employers who wanted to provide better benefits for their executives often gave them bonuses to cover the extra tax hit.
Under Obamacare, however, that is no longer how the penalty will be levied. The penalty for discrimination under the ACA is imposed on the company and it amounts to a fine of $100 per day per affected employee. “It’s so costly that this practice is effectively prohibited,” Fenton notes.
Confused yet? Here’s where we throw another wrinkle at you. In January 2011, the IRS declared that the non-discrimination rules of the ACA would not be enforced until it issued new regulations covering them, which it so far has not done. “There had been some rumors about the regulations coming out before 2014, but that seems highly doubtful right now,” Fenton says.
That means your situation falls under a grace period where the new rules are not being enforced–for now. In general, however, contributing for dependent coverage for only one employee and not doing it for your other employees could be construed as discriminatory and probably isn’t a great idea.
If you want to continue helping this particular employee, it might be a better idea to simply give her a taxable bonus that she can use to contribute more towards her family insurance coverage, or buy a separate policy that would cover her child, Fenton suggests.