Before 1/1/2014, small businesses had tremendous flexibility in how they compensated their employees with health insurance coverage. Most small businesses didn’t want to establish a group health insurance plan and so would reimburse some or all employees for the employee’s individual health insurance premiums.
Various provisions of the tax code allowed small businesses to 1.) pick and choose which employees they wanted to compensate in this manner (i.e., discriminate), and 2.)reimburse the employee for their health insurance premiums on a pre-tax basis (i.e., the employer could give the employee money and the employee wouldn’t be taxed on it).
An IRS Notice issued at the end of 2013 put an end to this. The discrimination rules have tightened up and you can no longer reimburse employees for their individual health insurance premiums on a pre-tax basis.
Starting 1/1/2014, the only way for an employer to help pay for some of the employee’s health insurance premiums in a manner that doesn’t create taxable compensation to the employee is to establish a group health insurance plan under the employer and then pay for some or all of the employee’s group health insurance premiums.