How IRS Coverage Mandates Affect Workers' Compensation Costs in 2026.
A decade ago, the IRS slammed the door on a popular employer strategy: dumping workers into health insurance exchanges with tax-free cash. That 2014 ruling continues to shape workers' compensation landscapes today, as employers navigate evolving healthcare costs that directly impact claim expenses.
The Original Prohibition
In May 2014, the IRS issued guidance blocking employers from simply handing employees money to buy individual health insurance on ACA exchanges. The penalty? A staggering $36,500 per year for each affected employee—$100 per day per employee who entered the individual marketplace without proper employer-sponsored coverage.
The ruling targeted "employer payment plans" where businesses attempted to shift health costs to government exchanges rather than offering compliant group coverage. Under the Affordable Care Act's employer shared responsibility provisions, applicable large employers (those with 50+ full-time employees) must offer affordable health coverage that provides minimum value to full-time workers and their dependents.
What Changed: The QSEHRA Solution
The landscape shifted in 2017 when Congress created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) through the 21st Century Cures Act. This legitimate alternative allows small businesses (fewer than 50 employees) to reimburse employees for health insurance premiums and medical expenses—tax-free—without triggering ACA penalties.
For 2025, QSEHRA contribution limits are:
- $6,350 for individual coverage
- $12,800 for family coverage
However, strict requirements apply. Employees must maintain Minimum Essential Coverage (MEC) as defined by the ACA, and employers cannot offer group health plans alongside a QSEHRA.
Current IRS Guidance
The IRS continues to enforce these rules through multiple notices:
- Notice 2013-54 - Original market reform guidance
- Notice 2015-17 - Transition relief for certain arrangements
- Notice 2015-87 - Additional HRA guidance
Updated IRS documentation is available at:
The Workers' Compensation Connection
The relationship between employer health coverage mandates and workers' compensation claims is more direct than many realize:
1. Rising Healthcare Costs Drive Claim Expenses
Employer-sponsored health coverage costs are projected to exceed $16,000 per employee in 2025—a 9% increase. The Centers for Medicare and Medicaid Services (CMS) project healthcare spending will grow 5.4% annually through 2028. These escalating costs directly impact workers' compensation medical expenses, as injured workers receive treatment in the same healthcare system experiencing rapid inflation.
2. Medical Cost Spillover
Medical inflation in workers' compensation, while historically lower than general healthcare inflation, is rising. When employers face mounting pressure to control health benefit costs, they may inadvertently create gaps in care that complicate workers' compensation claims. Employees without adequate primary health coverage may delay treatment, leading to more severe workplace injuries requiring costlier interventions.
3. Premium Rate Impacts
For 2026, the ACA affordability threshold increased to 9.96% (up from 9.02% in 2025). Employers struggling to meet both ACA mandates and workers' compensation insurance obligations face compound financial pressures. States are already adjusting workers' comp premium rates to reflect economic trends—some increasing rates due to higher physician reimbursements and wage inflation.
4. Experience Modification Rates
The National Council on Compensation Insurance (NCCI) increased the "primary claims" threshold to $18,000 per claim. Employers with claims exceeding this threshold may see Experience Modification (X-Mod) adjustments leading to higher workers' compensation premiums. When health coverage issues delay treatment or complicate injuries, claim costs escalate, affecting X-Mod calculations.
5. Comorbidity Complications
Recent data shows workers' compensation claims are increasingly complex due to comorbid health conditions. A WCRI study analyzing over 930,000 claims across 32 states found that degenerative and comorbid conditions consistently correlate with higher costs and longer temporary disability durations. Adequate employer health coverage helps manage these underlying conditions before workplace injuries occur.
2026 Compliance Landscape
For 2026, employers must navigate:
ACA Reporting Deadlines:
- Electronic filing (Forms 1094-C and 1095-C): March 31, 2026
- Paper filing: March 2, 2026
- Employee furnishing: March 2, 2026 (or within 30 days of request under alternative method)
State-Specific Requirements:
- California: Filing deadline March 31, 2026
- New Jersey: Filing deadline March 31, 2026
- Rhode Island: Filing deadline March 31, 2026
- Massachusetts: Filing deadline January 31, 2026
Strategic Implications
The original IRS prohibition remains critical for workers' compensation stakeholders:
- Employers must maintain compliant health coverage to avoid penalties while managing workers' comp costs in an inflationary environment
- Insurance carriers should recognize that inadequate employee health benefits may lead to more severe workers' compensation claims
- Injured workers benefit from employers who provide comprehensive health coverage, as it supports overall health and faster recovery from workplace injuries
- Claims administrators must account for how gaps in primary health coverage complicate workplace injury treatment and recovery
The Bottom Line
The IRS mandate preventing employers from dumping workers into exchanges wasn't just about ACA compliance—it was about maintaining the employer-sponsored health system that supports American workers. For workers' compensation, this protection is essential. When employees have solid health coverage, they're healthier entering the workplace, recover faster from injuries, and generate lower claim costs.
As healthcare costs continue rising at 9% annually and workers' compensation medical inflation accelerates, the intersection of health coverage mandates and workers' comp claims will only grow more significant. Employers who view health benefits and workers' compensation as integrated risk management tools—rather than separate cost centers—will achieve better outcomes for both their employees and their bottom line.
Key Takeaways:
- IRS still prohibits employer payment plans that circumvent ACA requirements
- QSEHRA provides legitimate alternative for small businesses
- Rising healthcare costs ($16,000+ per employee in 2025) directly impact workers' comp claim expenses
- Adequate health coverage reduces workers' comp claim severity and costs
- 2026 ACA affordability threshold: 9.96% of employee income
- Compliance failures trigger $100/day/employee penalties
Resources:
- IRS Employer Health Care Arrangements
- ACA Employer Tax Provisions
- S Corporation Compensation & Medical Insurance
*Jon L. Gelman of Wayne, NJ, is the author of NJ Workers' Compensation Law (West-Thomson-Reuters) and co-author of the national treatise Modern Workers' Compensation Law (West-Thomson-Reuters).
Blog: Workers' Compensation
LinkedIn: JonGelman
LinkedIn Group: Injured Workers Law & Advocacy Group
Author: "Workers' Compensation Law" West-Thomson-Reuters
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© 2026 Jon L Gelman. All rights reserved.
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