In this article, Garrett Fenton comments on the possible issues an employer who extends extra health benefits to certain employees may face under the Affordable Care Act (ACA). The main consideration is what kind of employee is receiving the benefits. According to Fenton, that’s because under Internal Revenue Service (IRS) law dating back to 1981 (tax code section 105(h)), employers have been prohibited from discriminating in favor of their highly compensated employees under self-insured group health plan offerings. The definition of "highly compensated" in this case is an employee who holds more than a certain percentage of company stock; is one of its highest-paid officers; or gets a salary in the top 25 percent of all the company’s employees.
The IRS's penalty for discrimination under the old rules was not imposed on the employer; it was imposed on the highly compensated individuals, making their excess health benefits subject to taxation. That often did not amount to a large sum, Fenton said, so employers who wanted to provide better benefits for their executives often gave them bonuses to cover the extra tax hit. Under the ACA, however, the penalty for discrimination is imposed on the company and it amounts to a fine of $100 per day per affected employee. "It’s so costly that this practice is effectively prohibited," Fenton said.