Before the provisions of the Affordable Care Act became effective, it was common for small employers to avoid the time and expense involved in maintaining a group health insurance program for their employees by simply reimbursing amounts paid by the employees for private health insurance purchased on the individual market. Under the Internal Revenue Code, this reimbursement can be made pre-tax to the employee.

All this changed with the arrival of the Affordable Care Act. Under guidance issued jointly by the IRS and the Department of Labor (, such an arrangement constitutes an “employer payment plan,” a type of group health plan, and by its very nature cannot meet the requirements of the Affordable Care Act. These arrangements are now subject to the $100-per-day-per-employee penalty under § 4980D of the Internal Revenue Code.

The IRS/DOL guidance states that the term “employer payment plan” does not include an arrangement under which the employee may choose between cash and an after-tax amount to be applied toward health coverage. Employers may forward post-tax wages to a health insurance issuer at the direction of an employee without establishing a group health plan, as long as certain standards of the DOL regulations at 29 C.F.R. § 2510.3-1(j) (the “Voluntary Plan Safe Harbor”) are met. These standards are met by a given program if:


  • No contributions are made by the employer (a choice between cash and an after-tax amount to be applied toward health coverage is not considered a “contribution” in this context);
  • Participation in the program is completely voluntary for employees;
  • The sole functions of the employer with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees, to collect premiums through payroll deductions, and to remit them to the insurer; and
  • The employer receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with the payroll deductions.

An arrangement meeting these criteria, where the employer meets the requirements of the Voluntary Plan Safe Harbor and employees can choose between cash and the post-tax payment of premiums, is not considered an “employer payment plan” and therefore is not a group health plan subject to the group market reform provisions of the Affordable Care Act.

If you have questions about your health insurance arrangements, please contact your Boulay accounting or tax advisor at 952.893.9320 or

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