Temporary Relief for Small Employers Offering Health Insurance Reimbursement Plans
Author: Robert Conner
The IRS recently released Notice 2015-17, which provides transitional relief from the $100 per day per employee excise tax penalty imposed on taxpayers with employer payment plans that fail to comply with the Affordable Care Act (ACA) market reform provisions.
Employer payment plans are common among smaller employers. Through these arrangements, the employer directly pays or reimburses employee-paid premiums for nonemployer-sponsored hospital and medical insurance. The employer then excludes the premiums from the employee’s income. The IRS, U.S. Department of Labor (DOL) and U.S. Department of Health and Human Services previously have indicated employer payment plans covering two or more employees are considered group health plans and will run afoul of the market reform provisions for plan years beginning after December 31, 2013, subjecting the employer to penalties.
In response to questions and concerns received by the departments, Notice 2015-17 includes certain key relief provisions:
Transition Relief for Small Employers – For employers with fewer than 50 full-time employees offering an employer payment plan, the excise tax penalty will not be assessed for 2014 or the first six months of 2015. However, for periods beginning after June 30, 2015, all employers offering an employer payment plan covering two or more employees will be subject to the excise tax penalty, regardless of whether the health reimbursements are provided on a pre- or post-tax basis.
Increases in Employee Compensation to Assist with Payments of Individual Market Coverage – The excise tax penalty generally will not be levied against an employer that increases an employee’s compensation but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form or issuer of health insurance). Providing employees with information about the Marketplace or the premium tax credit is not considered endorsement of a particular policy, form or issuer of health insurance.
Treatment of S Corporation Health Care Arrangements for 2 Percent Shareholder-Employees – Through the end of 2015 and until more guidance is issued, the excise tax penalty will not be assessed for any failure to satisfy the market reforms by a 2 percent shareholder-employee health care arrangement. This is generally defined as an arrangement wherein an S corporation pays for or reimburses premiums for individual health insurance coverage covering a shareholder who owns more than 2 percent of the S corp stock. The payment or reimbursement is included in income, but the 2 percent shareholder-employee may be able to deduct the amount of the premiums on his or her individual income tax return.
While this notice provides welcome relief to small employers, the excise tax exemption is temporary. Therefore, employers that provide insurance to their employees should continually evaluate their plans to ensure ACA market reform compliance.
If you have questions or concerns regarding how the ACA affects your organization, contact your BKD advisor.