With the advent of Obamacare and all the changes in the health insurance markets, sometimes the easy thing for the employer is to tell his employees is, “I’ll give you $2,000, you should get your own health insurance”.
In the past, you couldn’t do this because it was difficult to get insurance on an individual basis. In addition, if the employees buy it on their own, they can get the subsidies from the insurance exchanges (only low income would qualify).
Seems like an easy and an elegant solution?
Normally, health insurance purchased by the employer is tax-free to the employee. In addition, the employees contributions generally reduce his taxable income too, so they aren’t taxed either.
So why wouldn’t money given to the employee to purchase his own insurance be tax free too?
The answer is in the convoluted rules of the IRC and the Affordable Care Act. But the bottom line is that it is not.
That means you would give the employee $2,000, he would pay payroll and income tax on it, and with the $1,200 he has left he can buy the insurance. Elegant solution not.