By Tom Breedlove, HomePay by Breedlove
As we’ve discussed in this space before, the Affordable Care Act requires all individuals to have a health insurance policy or pay a fine. Just a friendly reminder, open enrollment for 2015 began on November 15th and will close on February 15th for nannies that wish to purchase a policy on their own. Depending on your income level, you could qualify for a subsidy that will lower the cost of your premiums – but only if the family you work for pays you on the books. All this information is hopefully well-known by now, but recently some aspects of the Affordable Care Act have clashed with sections of the tax code and nannies need to be aware of them.
Some nannies have a portion, or all of their health insurance premiums paid for by the family. It’s a very generous gesture for the family to make and – from a tax perspective – saves money for both parties as opposed to the family simply giving their nanny a raise so the nanny can buy health insurance on her own. This is because the IRS says an employer can contribute to their employee’s health insurance policy and that portion of compensation is not taxable for you or your employer.
But one of the provisions of the Affordable Care Act goes a little against this statement. It states that only employers that purchase a health insurance policy for their employees through the newly-created Small Business Health Options Program (SHOP) can contribute to the policy tax-free.
What is SHOP?
SHOP is a marketplace similar to the one individuals can use to purchase health insurance – only it’s for “small businesses.” And yes, for tax purposes, the IRS looks at families with a nanny like they’re a small business. Families can select a health insurance policy for their nanny and then offer it to them during the hiring process. The family can then contribute any amount they want if the nanny accepts the policy. Unfortunately, when health insurance is set up in this manner, the employee cannot qualify for a subsidy like they can if they purchase a policy on their own. The idea behind the subsidy is to help workers defray the cost of insurance, which the government views as not necessary if you’re getting a policy from your employer.
So what is the right way to handle health insurance?
We have confirmed with the IRS that families with only 1 employee can still contribute to their employee’s health insurance policy tax-free without going through SHOP – although they can still elect to do so if they choose. Families that have 2 or more employees – let’s say a nanny and a housekeeper – must purchase the policies through SHOP (at www.healthcare.gov/small-businesses) or else any health insurance contributions are taxable for them as well as the employees.
We realize many of you reading this are your family’s only employee, but we wanted to clarify this law because there is some misinformation floating around about this topic. This is very common when a new piece of legislation is introduced and we simply want you to know the truth. If you or the family you work for has any further questions about health insurance, feel free to call for a consultation. We’re here to help!