The IRS views some health coverage reimbursement arrangements as health coverage plans that fail to comply with the Affordable Care Act (ACA). As such, small employers, generally those with less than 50 full-time employees, who offer these plans, were set to be subject to an excise tax of $100 per employee per day, up to an annual maximum of $36,500 per employee. However, on February 18, 2015, the IRS issued notice 2015-17, which provides transitional and temporary relief from this excise tax.
Relief comes in a few different forms. First, the transitional relief – because small employers are not able to fully access the Small Business Health Insurance Options Program (SHOP) Marketplace, employers who reimburse for health insurance premiums, will be given until June 30, 2015 to change their plans to ACA accepted plans. Other types of arrangements that reimburse employees for medical expenses, rather than for premiums only, would not qualify for this relief.
In addition, temporary relief is being provided by Notice 2015-17 to S-Corp plans that reimburse 2% shareholder employees for health insurance premiums. While these plans are also considered to be in violation of the ACA, the IRS needs more time to issue guidance for this type of situation. Therefore, this group has been given relief until such guidance is issued, but at least through 2015. Further, on their individual tax return, the S-Corp shareholders will continue to be able to treat these premiums pursuant to IRS Notice 2008-1. In other words, while shareholder health insurance premiums are included in gross wages, the shareholder also receives a corresponding deduction for Self-employed health insurance.
Nonetheless, if you prefer to keep your health insurance reimbursement arrangement, the IRS offers a compromise – instead of reimbursing your employees for health insurance premiums, give them a raise. The IRS suggests, in Notice 2015-17, that employers may grant additional compensation in lieu of a reimbursement plan. However, the additional compensation may not be conditioned on the payment of health insurance premiums by the employee or otherwise endorse any particular policy, form or health insurance provider.
Other items notable included in IRS Notice 2015-17:
- Applicable Large Employer status (having more than 50 full-time employees) for a year is normally based on the prior calendar year, Notice 2015-17 permits employers to select six or more consecutive calendar months to make the determination. This may help a larger employer stay under the 50 employee threshold.
- A special rule to exempt a program reimbursing employees for all or some of the premiums of Medicare Part B or D.
Finally, since there is uncertainty as to whether a permanent legislative solution will follow this notice, small employers should take advantage of this window to search for an alternative means of contributing to employee healthcare costs if they chose to do so. The IRS has indicated that more guidance will be issued in the near future.
Barnes Dennig offers tax consulting services to help ensure continuing compliance with applicable laws. Reach out to a tax specialist here.