Are health deductions required deductions for garnishment?
Q: An employee whose wages are subject to a child support withholding order mentioned that his deductions for group health benefits should be considered involuntary deductions, since the ACA requires him to carry health insurance or pay a tax penalty. That way, we would factor the deductions into his disposable earnings. Is he correct? How should we handle health insurance deductions as they relate to calculating disposable earnings?
A: Your employee is wrong. The ACA does mandate that most taxpayers carry health insurance, but there is no requirement that it be obtained through the employer. So, strictly speaking, employer coverage is voluntary and, therefore, his deductions remain voluntary. You still don’t count them when figuring his disposable earnings for a child support withholding order or for a creditor garnishment.
Must we tax employees who are paid to forgo health benefits?
Q: Any employee who opts out of our group health plan receives $200 a month. They can either buy individual health insurance through the exchange or pocket the money. Is the $200 taxable to employees?
A: It depends. Employees who receive a financial incentive to opt out of the health plan altogether have taxable compensation. You may treat these payments as supplemental wages and withhold federal income tax at the flat 25% rate. Of course, FICA taxes apply.
However, if employees buy individual health policies, they aren’t taxable, since health insurance is a tax-free. Employers used to fund these arrangements through employer payment plans. These days, employer payment plans usually take the form of health reimbursement accounts (HRAs). Employers that fund HRAs, the purpose of which is to allow employees to buy individual health insurance through the exchanges, will be liable for an excise tax equal to $100 per day, per employee. The IRS has concluded that HRAs that aren’t integrated into a group health plan, and these HRAs would not be, don’t meet the ACA’s market reforms, including no limits on lifetime or annual coverage and coverage of preventive services.