IRS Provides Penalty Relief for Employer Payment Plans Offered by Small Employers

Practical Law Legal Update 6-600-9553 (Approx. 7 pages)

IRS Provides Penalty Relief for Employer Payment Plans Offered by Small Employers

by Practical Law Employee Benefits & Executive Compensation

Limited Excise Tax Relief for Employer Payment Plans Offered by Small Employers

Building on earlier guidance, Notice 2015-17 makes available limited relief from excise taxes for small employers that sponsor "employer payment plans." Under Notice 2013-54, an employer payment plan is either:

A group health plan in which an employer reimburses employees for some or all premium expenses for an individual health insurance policy.
An arrangement under which the employer directly pays premiums for an individual health insurance policy covering an employee (see Legal Updates, Guidance Addresses the ACA's Impact on EAPs, HRAs and Health FSAs and Excise Taxes Apply to Employer Reimbursements of Employee Health Insurance Premiums).

An employer payment plan generally excludes arrangements under which an employee may either have an after-tax amount applied to health coverage or take that amount in cash compensation. Also, Notice 2015-17 clarifies that an arrangement under which an employer increases an employee's compensation but does not condition payment of this additional compensation on the purchase of health coverage (or does not otherwise endorse a particular policy, form or health insurer) is not an employer payment plan.

For purposes of Notice 2015-17, a "small employer" is an employer that is not an "applicable large employer" (ALE) under the IRS' final employer mandate regulations (26 U.S.C. § 4980H(c)(2); 26 C.F.R. § 54.4980H-1(a)(4); 26 U.S.C. § 54.4980H-2)). Under the employer mandate regulations, an ALE is an employer that employed on average at least 50 full-time employees (including full-time equivalent employees) on business days during the prior year (see Practice Note, Employer Mandate Under the ACA: Overview: Large Employers and Members Are Subject to Employer Mandate).

Because the government views employer payment plans as group health plans, employer payment plans:

Are subject to the Affordable Care Act's (ACA's) market reforms for group health plans, for example:
- the prohibition of annual limits on essential health benefits (see Practice Note, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA); and
- required coverage of certain preventive health services (see Practice Note, Preventive Health Services Under the ACA, Other Than Contraceptives).
Will fail to satisfy these ACA market reforms, for example, because an employer payment plan cannot be integrated with an individual policy for purposes of the ACA annual limit prohibition (see Legal Update, Guidance Addresses the ACA's Impact on EAPs, HRAs and Health FSAs).
May be subject to excise taxes of $100/day (26 U.S.C. § 4980D) (see Legal Update, Excise Taxes Apply to Employer Reimbursements of Employee Health Insurance Premiums).

In Notice 2015-17, the IRS provides limited transition relief from 4980D excise taxes for small employers. Specifically, excise taxes will not be assessed for any failure to satisfy the ACA market reforms by employer payment plans that pay or reimburse employees for individual health policy premiums (or Medicare Part B or Part D premiums) for:

2014, as to employers that were not ALEs for 2014.
January 1 through June 30, 2015, as to employers that are not ALEs for 2015.

After June 30, 2015, however, small employers may be liable for Section 4980D excise taxes.

Employers eligible for this relief need not file IRS Form 8928, which is used by group health plans to self-report excise taxes, solely for having employer payment plans during the periods covered under the Notice 2015-17 limited transition relief. The transition relief does not extend to stand-alone HRAs or other arrangements to reimburse employees for medical expenses other than insurance premiums (see Practice Note, Defined Contribution Health Plans).

Treatment of S Corporation Healthcare Arrangements

The Notice also addresses the post-ACA tax treatment of S-corporation healthcare arrangements for 2% shareholder-employees. When an S corporation pays or reimburses premiums for individual health insurance coverage for a 2% shareholder:

The payment or reimbursement is included in the 2% shareholder-employee's income.
The 2% shareholder-employee generally may deduct the premiums if applicable eligibility criteria are satisfied.

(Notice 2008-1.)

These arrangements are known as 2% shareholder-employee healthcare arrangements. The DOL, HHS and Treasury (collectively, the Departments) may issue additional guidance on the application of the ACA's market reforms to these arrangements. Until that guidance is issued (and through 2015), however:

Section 4980D excise taxes will not be enforced against a 2% shareholder-employee healthcare arrangement that does not satisfy the ACA's market reforms.
An S-corporation with a 2% shareholder-employee healthcare arrangement need not file Form 8928 solely as a result of having the arrangement.

Reimbursement Arrangements for Employees Covered by Medicare and TRICARE

Medicare Premium Reimbursement Arrangements for Active Employees

Notice 2015-17 clarifies that an employer payment plan:

Includes arrangements under which an employer reimburses (or pays directly) Medicare Part B or Part D premiums for employees, and that if this arrangement covers two or more active employees, it is a group health plan subject to the ACA's market reforms (see generally Practice Note, Changes to Medicare Part D Under the ACA Affecting Retiree Medical Plans).
May not be integrated with Medicare coverage to satisfy the ACA's market reforms because Medicare coverage is not a group health plan.

Under an exception, however, an employer payment plan that pays for Medicare premiums is integrated with another group health plan offered by the employer for purposes of the ACA annual limit prohibition and preventive health services requirements, if the following conditions are met:

The employer offers a group health plan (other than the Medicare premium reimbursement arrangement) to the employee that:
- does not consist solely of excepted benefits; and
- offers coverage providing minimum value.
The employee who participates in the reimbursement arrangement is actually enrolled in Medicare Parts A and B.
The reimbursement arrangement is available only to employees enrolled in Medicare Parts A, B or D.
The reimbursement arrangement is limited to reimbursing Part B or Part D premiums and excepted benefits, including Medigap premiums.

Also, Medicare reimbursement arrangements offered to active employees may be subject to other restrictions, such as the Medicare secondary payer rules. An employer payment plan with fewer than two participants who are current employees on the first day of the plan year is not subject to the ACA market reforms and need not be integrated with a group health plan.

TRICARE-Related HRAs

Relatedly, an employer arrangement that reimburses (or pays directly) for medical expenses for employees covered by TRICARE (that is, the health care program for military personnel, retirees and their dependents) is an HRA. If this arrangement covers two or more active employees, it is a group health plan subject to the ACA's market reforms. An HRA may not be integrated with TRICARE to satisfy the market reforms because TRICARE is not group health plan.

Under an exception, however, an HRA that pays for medical expenses for employees covered by TRICARE is integrated with another group health plan offered by the employers for purposes of the annual limit prohibition and preventive services requirements if:

The employer offers a group health plan (other than the HRA) to the employee that:
- does not consist solely of excepted benefits; and
- offers coverage providing minimum value.
The employee participating in the HRA is actually enrolled in TRICARE.
The HRA is available only to employees who are enrolled in TRICARE.
The HRA is limited to reimbursements of cost sharing and excepted benefits, including TRICARE supplemental premiums.

An employer may provide more than one type of health arrangement for its employees (for example, a Medicare Part B employer payment plan and a TRICARE-related HRA), if each arrangement meets the applicable integration or other rules provided in Notice 2015-17 and related guidance.

Treating Employer Payment Plans as Taxable Compensation

In Revenue Ruling 61-146, the IRS permitted an exclusion from employee gross income for employer reimbursements of an employee's substantiated premiums for non-employer sponsored hospital and medical insurance (or if the employer pays the premiums directly to the insurance company). Notice 2015-17 clarifies that payments under an arrangement that satisfies Revenue Ruling 61-146:

Continue to be excludable from an employee's gross income (26 U.S.C. § 106).
Are subject to the ACA market reforms for group health plans, regardless of whether the employer treats the money as pre-tax or post-tax to the employee.
Cannot be integrated with individual market policies to satisfy the ACA market reforms, and will therefore fail to satisfy the ACA annual limit prohibition and preventive health service requirements (among other provisions).

Practical Impact

Notice 2015-17 is the latest in a series of guidance in which the Departments have warned employers of the potentially severe consequences of reimbursing employees for premiums they pay for health insurance. In a notable Q&A from last year, for example, the IRS emphasized that employer payment plans were subject to $100/day excise taxes, which could total $36,500 per year, per employee. The Departments acknowledge in Notice 2015-17 that some employers who have offered health coverage through an employer payment plan may need additional time to adopt an alternative, including Small Business Health Options Program (SHOP) Marketplace coverage. However, the transition relief window provided under the Notice (that is, through June 2015) is relatively short.

IRS Provides Penalty Relief for Employer Payment Plans Offered by Small Employers | Practical Law