Organizations with Only One Employee Can Pay Individual Policy Premiums Tax-Free

BMWL has confirmed with subject matter experts that unique provisions in federal healthcare and tax law permit an organization with only one employee to pay or reimburse its sole employee’s insurance premiums for an individual health insurance policy tax-free without violating the market reforms provisions of the Affordable Care Act.

We have confirmed the following information with attorneys Carrie Byrnes and Danny Miller, who specialize in employee benefits law with the firms Bryan Cave and Conner & Winters, respectively.

Affordable Care Act

There is one scenario under the existing healthcare law and regulations in which a specific exception clearly applies to the prohibition on reimbursing employees for individual health premiums – when an employer has only one employee and pays or reimburses the premiums for that sole employee’s individual health policy.   This conclusion is supported by DOL Technical Release 2013-03.

Federal tax law

Pursuant to Revenue Ruling 61-146, the payment of health premiums under such a single-employee arrangement can be excluded from the employee’s taxable income under Internal Revenue Code Section 106 if the payment of premiums is substantiated (documented) or if the employer pays the premiums directly to the insurance company.

This single-employee exception applies (under both the Affordable Care Act and federal tax law) regardless of whether the sole employee’s health insurance policy is obtained through a private insurance provider directly or through the marketplace exchange system.

Organizations that are part of a controlled group are aggregated

In applying the exception described above, Byrnes and Miller point out that an organization that is controlled by or is under common control with one or more other organizations will be aggregated for purposes of determining whether the organization has only one employee.  For example, under current guidance (which requires a reasonable, good faith interpretation of existing law in determining which entities must be aggregated), if a church that has multiple employees controls (by having the authority to appoint its entire board) a separately incorporated counseling organization and the counseling organization has only one employee, then the two entities are aggregated and treated as a single employer.  This means that the single-employee exception described above will not apply.

The clarity of the exception described above applies only to the fact scenario described above

In confirming the single employee exception described in this Alert, Byrnes and Miller also note that while there is clarity with respect to the exact single-employee scenario described above, such clarity does not yet exist with respect to other fact situations.  For example, the same clarity does not exist in a scenario where an employer has two employees – one full-time and one part-time, and the employer only pays the premiums for the full-time employee.

With the uncertain state of the law, employers should consult their benefits counsel in determining how the law applies to them.  Violating the provisions of the federal tax law or the new federal healthcare law can result in very substantial penalties.

This publication is for general informational and educational purposes only, and does not constitute legal, accounting, tax, financial, or other professional advice. It is not a substitute for professional advice. For permission to reprint, please contact us.  © 2023 Batts Morrison Wales & Lee, P.A.  All rights reserved.
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