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On February 18th, 2015, the Internal Revenue Service released Notice 2015-17 outlining that penalties levied on small businesses with under 50 employees taking part in an Employer Payment Plan will be delayed until June 30, 2015. The notice provides limited transition relief from the assessment of excise taxes for small employers who reimburse, or directly pay, the premium for an employee's individual health insurance policy.
Prohibited Plans
An "employer payment plan" is an arrangement under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, or an arrangement under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee. Pursuant to prior agency guidance, employer payment plans are generally considered group health plans that do not comply with certain market reforms of the Affordable Care Act (ACA), and therefore may be subject to a $100 per day excise tax per applicable employee under the federal tax code.
Transition Relief
The transition relief applies to employer healthcare arrangements that constitute employer payment plans if the plan is sponsored by a small employer-generally an employer with fewer than 50 full-time employees, including full-time equivalents, as determined in accordance with the "pay or play" rules. An excise tax will not be asserted for any failure to satisfy the ACA's market reforms by employer payment plans sponsored by small employers that pay, or reimburse employees for individual health policy premiums (or Medicare Part B or Part D premiums):- For 2014, for employers that qualify as small employers for 2014; and
- For January 1 through June 30, 2015, for employers that qualify as small employers for 2015.
After June 30, 2015, such employers may be liable for the excise tax. The relief does not extend to stand-alone HRAs or other arrangements to reimburse employees for medical expenses other than insurance premiums.
Why are Employer Payment Plans Subject to IRS Penalties?
In 2013, the IRS issued Notice 2013-54, which classified Employer Payment Plans as group health plans and therefore subject to Affordable Care Act market reforms. These reforms include the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 mandated that employers offering Employer Payment Plans fail to comply with these market reforms and may be subject to $100/day excise tax per applicable employee.
Subsequent Department of Labor rulings have outlined that regardless of whether these types of reimbursements occur on a pre-tax or post-tax basis, the arrangement constitutes a group health plan and must adhere to the ACA market reforms.
Does the IRS Notice 2015-17 Impact HRA Plans?
Notice 2015-17 reiterates that health reimbursement arrangements (HRAs) with fewer than two employees do not qualify as a group health plan and, therefore, are not subject to the Affordable Care Act market reforms.
What does the recent announcement mean for Medicare or Tricare employer reimbursements?
Yes, Notice 2015-17 specially addresses the use of employer arrangements to fund Medicare premium payments or to provide a TRICARE-related health reimbursement arrangement. If such arrangements cover two or more active employees, then the arrangement is a group health plan and is subject to the ACA market reforms and to the associated penalties after the June 30, 2015 extension.
What does the recent announcement mean for Sub "S" Businesses?
Specifically, the IRS will continue to allow more than two percent shareholders in an S corporation to deduct their premiums on Page 1 of Form 1040 pursuant to Section 162(l). Tax penalties also will be delayed on more than two percent S Corporation shareholders until further guidance is issued.
Where Does This Leave a Small Business Subject to These IRS Penalties?
Notice 2015-17 also clarifies that employers can generally increase an employee's compensation to assist with payments of individual market coverage, so long as the payment of additional compensation is not conditioned on the purchase of health coverage and the employer does not otherwise endorse a particular policy, form, or issuer. Due to the potential for significant penalties and the complexity of the law in this area, employers considering a cash (or payroll practice) option are strongly advised to consult knowledgeable benefits counsel to ensure full compliance with the law.
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