IRS Penalties for Small Employers Reimbursing Individual Health Insurance Premiums Will Not Apply Until July 2015
IRS Notice 2015-17 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.
Note: While Medicare premium reimbursement arrangements generally constitute employer payment plans, an employer payment plan that has fewer than two participants who are current employees (for example, a retiree-only plan) on the first day of the plan year is not subject to the ACA market reforms.
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.
Additional Information 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.
Additional information on these types of arrangements is available from the federal agencies in IRS Notice 2013-54, the ACA FAQs, and other IRS Q&As.
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