Sometimes Helping an Employee with Healthcare Coverage Can Be Risky

It is now a common knowledge that employers of less than 50 employees are not mandated under the Affordable Care Act (ACA) to provide any for health insurance to its employees.  But suppose a particular company with a self-insured plan, as a gesture of kindness, elects to provide health benefit to one employee because they are feeling sorry for him or her, the company might be in violation.  A self-insured plan means the company uses its own fund to provide health coverage to its employee.  The company can be charged by the Internal Revenue Service (IRS) of a violation, under Tax Code 105 (h), which has been in effect since 1981, for discriminating in favor of its “highest paid employees” (Klein, 2013).  However, if the employee is covered under the highest paid employee definition, which is an employee who has large share of the stocks in the company, one of the highest paid officers in the company, or in the top 25% of salaried employees, more than likely this statute will not apply therefore, the company is off the hook.   Also, the IRS has been lax on this matter in the past and has not fully outlined the regulation.  Moreover, Tax Code 105 (h) penalizes the employee not the employer in the form of taxes, because the IRS sees it as an additional compensation for the employee (Klein, 2013).  The ACA has redefined the statute as such that the penalty will now be imposed on the employer not the employee, at a rate of $100 per day per employee (Klein, 2013).

Other lawyers, to the contrary, argued that helping one employee and not the rest of the employees on a self-funded plan can be regarded as a discriminatory act and may not pass the Eligibility Test.  The Eligibility Test consists of three items that must be satisfied by the self-funded plan:  a) the plan must actually benefit 70 percent or more of all employees; b) seventy percent or more of all employees must be eligible to participate in the plan, and of those eligible to participate, at least 80 percent must actually benefit under the plan; c) the plan must be set up to benefit a classification of employees that is found by the Secretary of the Treasury not to be discriminatory in favor of HCIs (, 2013).

The best strategy for the company, if they insists on providing health insurance to one particular employee, is to give the particular employee a taxable bonus that can be applied, for example on a health savings account plan. A health savings account (HSA) is a tax-exempt trust or custodial account that one can set up with a qualified HSA trustee to pay or reimburse certain medical expenses (, 2013).  The money on HSA is tax-deferred and also tax-free if withdrawn early to cover for unreimbursed medical expenses (Waldrop, 2013).



Cesar Aquino is a PhD Candidate in Healthcare Administration.