March 16, 2015
Some health coverage reimbursement arrangements offered by small employers (those with less than 50 full-time employees) are considered by the IRS to be non-compliant with the health coverage plan requirements set forth in the Affordable Care Act (ACA). Beginning January 1, 2014, employers who offer such plans were facing a significant penalty: an excise tax of $100 per employee per day, up to an annual maximum of $36,500 per employee. Employers should breathe a sigh of relief, however, because on February 18, 2015, the IRS issued notice 2015-17, which provides relief from this excise tax with the following provisions:
- Transitional tax relief for employers who reimburse for health insurance premiums but do not have ACA qualifying plans. These employers now have until June 30, 2015 to change their plans to ACA qualifying plans without penalty. Alternate arrangements that reimburse employees for medical expenses, rather than for premiums only, do not qualify for this relief. In addition, employers covered by this exemption are not required to file Form 8928, regarding failures to satisfy requirements for group health plans, including market reforms, with their 2014 tax return.
- Temporary tax relief for employers with S-Corp plans that reimburse more-than 2% shareholder employees for health insurance premiums. Essentially, these plans are still in violation of the ACA, but the IRS has yet to issue guidance for this type of situation so until further notice (likely until the end of 2015), these employers will have tax relief. S-Corp shareholders will continue to have health insurance premiums included in their gross wages, while receiving a deduction for self-employed health insurance and the IRS will not assert the Section 4980D penalty on S corporations that reimburses the insurance premiums of a more-than 2% shareholder.
For S corporations maintaining more than one reimbursement arrangement for different employees (regardless of whether they are more-than 2% shareholders), the various arrangements are treated as a single arrangement covering more than one employee. The S corporation will then be classified as conducting a group plan, rather than a single employee plan, and will be subject to the penalty when transitional relief expires. An important note: Notice 2015-17 exempts S corporations with only one employee from market reforms.
- Employers may keep their non ACA compliant health insurance reimbursement arrangement and give employees a raise instead of reimbursing them for health insurance premiums. If an employer opts to keep their existing non-ACA compliant plan instead of establishing a qualifying group plan, the only way to avoid penalties is for the employer to increase the salary of each employee which will be subject to increased income and payroll taxes. Importantly, an employer can in no way condition that the increased salary is dependent on an employee obtaining health insurance. An employee must be able to use their increased compensation at their discretion.
While Notice 2015-17 does offer some relief to businesses from the tax impact of the ACA, it is important to keep in mind that this relief is only temporary and that the IRS will be providing further clarification in the future. It is a good idea for employers to take this window of opportunity to review their employee healthcare plans and method of funding in order to make any adjustments necessary to avoid penalties. If you have additional questions, please contact our office, we are happy to help you.