Americans take beating from Affordable Care Act (ACA) and IRS with loss of tax free health insurance premiums through employers


By Ric Joyner

Unbeknownst to most Americans struggling to pay for increasing health insurance costs, the Internal Revenue Service, Department of Labor and Health and Human Services, announced a new notice that will aggravate the problem.   09-13-2013 the IRS issued Notice 2013-54 stating employees will no longer receive pre-tax insurance through their employers for health based polices purchased at home.

What does this mean for thousands of Americans? The ability for employees to pre-tax their medical insurance premiums paid at home occurred in this notice. The result is employees who purchase insurance at home will pay more taxes. This tax savings was created in 1961 and saves thousands of dollars in premium cost per year for employees. With the stroke of an IRS pen the savings is no longer allowed.  The focus of the ACA health care law seems to be that people are enrolled in group health insurance through their employers. The obvious problem is that this leaves thousands of small businesses scratching their heads on what to do about offering their employees affordable health insurance.  Several factors are increasing the cost of medical coverage for small employers due to ACA and normal trend increases. Thus causing choices for small business of whether to offer coverage or stay in business. Exacerbating this problem further is the recent Notice 2013-54. The effect on employees is disturbing.

What impact does this IRS change have on employees?  For example, consider a single mother. Not only are her hours being cut due to ACA polices but if the employer’s budget can no longer afford a group policy she must look elsewhere to purchase insurance on her own. Last Friday the IRS, DOL and HHS, presumably along with the Administration, stopped this mother’s ability to acquire a tax free deduction through a Health Reimbursement Arrangements (HRA) or Section 125 Premium Reimbursement Arrangement (PRA) through her employer.  The irony is that employees who have group coverage through an employer can pre-tax their portion of the group coverage. But with notice 2013-54 this is taken away from employees who don’t have group coverage in their employer. A big loss of tax savings and affordability for employees!

Let’s look further at the effect on employees. The example here explains how the IRS change impacts the working single mother. The employer notifies her of the loss of group coverage. She shops the market for individual insurance using either a private or government exchange. Assume for this example she purchases a health policy with a high deductible, which can cost $1,000 per month for her family. Prior to the new notice, her employer could pre-tax (tax free) her premium, thus saving her $250 using a Section 125 PRA. With a Section 125 PRA, the mother’s cost would “feel” like $750 per month.  In many cases the employer will put money into the fund tax free to help her afford the premium, but with this notice she is now taxed on this money…just because it is for premiums purchased at home or through an exchange. But the employees who have group coverage and pay a portion, CAN still get pre-tax dollars! For a working single mother this is a month’s car payment or rent! Gone in one administrative ruling!

Why is the administration via the ACA focused on employees carrying group medical insurance only versus getting people coverage regardless if it is employer based or individual? Why now when employers of all sizes are already considering their options for the 2014 enrollment season? Small employers across the country are scrambling now as the impact of this Notice filters through the economy to change their strategies. Small employers dropping group coverage, and thus the loss of health insurance for employees are more likely now after this notice than previous. Is this an unintended consequence of the ACA?

Does this federal notice have teeth or is it just proposed? Should the market ignore and move forward hoping the administration will see the “error of their ways”. This ruling may result in many thousands and perhaps millions of people not covered by health insurance. It’s time to stand up; it’s time to call your Congressional Representative.

Since this was an administrative ruling made quickly, it can be changed quickly by people complaining to their Representatives and the press. Contact and,  ask why the IRS has the ability to change deductions without going through Congress.

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