Many small-business owners find themselves between a rock and a hard place when attempting to renew their company’s health plan. the Small Business Healthcare Tax Credit situation is something Doug Jackson knows intimately.

Jackson, who runs an interior design company based in Santa Barbara, CA, discovered that the premiums for his existing plan were going up 20 percent. While he felt a moral obligation to provide his employees with healthcare – and had done so long before Obamacare mandated it, the increase threatened his livelihood. After checking on alternative plans, he learned that other plans offered as much as a 50 percent increase, while offering less generous co-pays and deductibles. “I really was forced to consider terminating my company’s employee health care.” he said. “Before I learned of Freedom Services, I wasn’t sure what I was going to do.”

Small Business Benefit Administration

Freedom Services, a full service employee benefit administrator headquartered in Burnsville, Minnesota, offers business-centric online claims reimbursement service. With help from the Freedom Services, Mr. Jackson created a new defined contribution plan, called “iPop”.

The new plan eliminates the stress of arranging health coverage by reimbursing employees for insurance they buy themselves. It enables Jackson’s employees to find affordable – and often cheaper – options on the individual market using the iPop software. It also ensures any contribution the company makes to its employees’ coverage is tax-free for the employees and excluded from payroll.
But Freedom Services may not be able to continue this service.

Last May, the Internal Revenue Service issued technical guidance memo with a clear warning about the Healthcare Tax Credit and similar health reimbursement arrangements. According to health and tax lawyers and lobbyists/analysts who have followed the Affordable Care Act’s adoption, the memo makes it very difficult, if not impossible, for an employer to pay for an employee’s individual insurance with tax-free dollars.

“The health law meant to make sure there are no dollar limits on the coverage for a person’s basic medical needs,” says Jackson. The IRS asserts that a plan reimbursing employees for insurance they buy on their own cannot comply with the prohibition on annual limits because the company’s contribution is limited by definition — even though the health employee purchased insurance would have no annual limits.

While Freedom Services claims they do not violate the prohibition on limits because premiums were not an essential health benefit, some companies are leery of buying into a plan that is basically untested.

Obamacare Changes the Small Business Healthcare Model

Prior to 2014, most companies looking to ensure their employees were covered had to select and manage the plans because they could not be certain their employees could acquire insurance individually. The Affordable Care Act creates more options on the individual market, but intensifies the debate about whether small businesses can continue to offer their employee’s healthcare at a price they can afford.

Freedom Services, along with companies such as HR Simplified and Zane Benefits, hope to facilitate the transition for small companies. Businesses can hire these companies to manage health reimbursement arrangements with built-in tax exclusion. Jackson’s company pays Freedom Services roughly $14 a month for each of its 30 employees to administer the plan. Jackson learned his employees could buy their own plan for 40 percent less than the same coverage within a group. And, if the employees receive government subsidies — and Jackson estimated up to one-third of his employees qualify — his savings can double.

Lawyers following the issue called the approach risky at best. “Clearly, the IRS says that you cannot use one of these arrangements to use tax-free dollars to pay for individual health insurance,” said Amy B. Monahan, a law professor at the University of Minnesota.

But Jackson and many others claim programs like the iPop plan work around the IRS memo, which does not specify whether insurance premiums are an essential health benefit. He went on to say that the IRS and other agencies have implied that a premium is not an essential health benefit, but regulators don’t like it.

Jackson is satisfied that his new employee healthcare package meets bot his needs and the needs of his employees, while meeting or exceeding the IRS requirements. Jackson insists his company operates in a manner that aboveboard and legal. Said Jackson, “I’m not looking to take on the IRS, all I want is to meet the intentions of the law and cover my employees with as small a hit as possible to our company’s profitability.”

IRS documentation on Health Savings and Health Reimbursement arrangements can be found here.

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