February 20, 2015
Internal Revenue Code (“Code”) Section 4980D assesses an excise tax of up to $100 per day for each employee for a group health plan’s failure to satisfy market reforms under the Affordable Care Act (“ACA”). On February 18, 2015, the Internal Revenue Service (“IRS”) issued Notice 2015-17 that supplements and clarifies previously issued Notice 2013-54 and other related guidance, regarding certain group health plans that fail to comply with these market reforms.
Specifically, this guidance addresses employer payment plans, under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health policy, or directly pays a premium for an individual health insurance policy covering the employee. Accordingly, Notice 2015-17:
The Departments of Labor and Health and Human Services (together with the IRS, the “Departments”) have reviewed the Notice and agree with the guidance provided. The Departments noted that they expect to issue further clarifications regarding other aspects of employer payment plans and HRAs in the near future.
Increases to Employee’s Compensation Permitted to Assist Employees Premium Payments for Individual Coverage
Notice 2015-17 clarifies that if an employer increases an employee’s compensation, but does not condition the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form or issuer of health insurance), it is not considered an employer payment plan.
According to the IRS, providing employees with information about the health care marketplace (“Marketplace”) or the premium tax credit is not endorsement of a particular policy, form or issuer of health insurance. Because this type of arrangement generally will not constitute a group health plan, it is not subject to the ACA’s market reforms.
Arrangements Reimbursing Medicare and TRICARE Premiums must be Integrated with another Group Health Plan
Notice 2015-17 notes that an arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees constitutes an employer payment plan. Similarly, an arrangement under which an employer reimburses (or pays directly) some or all of medical expenses for employees covered by TRICARE constitutes an HRA. In both cases, if the arrangement covers two or more active employees, it is a group health plan subject to the ACA’s market reforms.
An employer payment plan or an HRA may not be integrated with Medicare coverage or TRICARE to satisfy the market reforms, because Medicare coverage and TRICARE are not group health plans for integration purposes. However, an employer payment plan or HRA that pays for or reimburses Medicare Part B or Part D premiums, or medical expenses for employees covered by TRICARE, is integrated with another group health plan offered by the employer for purposes of the market reforms if:
Integration would not be required for 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 because such plans are not subject to ACA’s market reforms.
Also, an employer may provide more than one type of healthcare arrangement for its employees (for example, a Medicare Part B employer payment plan and a TRICARE-related HRA), provided that each arrangement meets the applicable integration or other rules.
Note that, to the extent that this type of arrangement is available to active employees, it may be subject to restrictions under other laws, such as the Medicare secondary payer provisions or laws that prohibit offering financial or other incentives for TRICARE-eligible employees to decline employer-provided group health plan coverage, similar to the Medicare secondary payer rules.
Transitional Relief Available for Small Employers
For employers who maintain employer payment plans that are not applicable large employers (“ALE”) under the ACA’s employer shared responsibility rules (an ALE has 50 or more full-time equivalent employees), Notice 2015-17 provides a delay until June 30, 2015 in being assessed the excise tax penalty. These employers may need additional time to obtain group health coverage or to adopt a suitable alternative.
Note that this relief does not extend to stand-alone HRAs or other arrangements that reimburse employees for medical expenses other than insurance premiums.
S Corporation Healthcare Arrangements for 2-percent Shareholder-employees
Under previously issued IRS guidance (Notice 2008-1), if an S corporation pays for (or reimburses) premiums for individual health insurance coverage covering a 2-percent shareholder, the payment or reimbursement is included in the shareholder-employee’s income, but her or she may deduct the amount of the premiums (provided that all other eligibility criteria for deductibility are satisfied). Notice 2015-17 refers to this as a 2-percent shareholder-employee healthcare arrangement.
The Departments stated that they may issue additional guidance on the application of the market reforms to healthcare arrangements with shareholder-employees. However, until further guidance is issued (and at least through the end of 2015), the excise tax will not be assessed for any failure of a 2-percent shareholder-employee healthcare arrangement to satisfy the market reforms.
The IRS is also considering whether additional guidance is needed on the federal tax treatment of 2-percent shareholder-employee healthcare arrangements. However, until additional guidance provides otherwise, taxpayers may continue to rely on Notice 2008-1 with regard to the tax treatment of these arrangements for all federal income and employment tax purposes.
If a 2-percent shareholder is allowed both the deduction described above and a premium tax credit for coverage through the Marketplace, Revenue Procedure 2014-41 provides guidance on calculating the deduction and the credit.
As indicated above, ACA’s market reforms do not apply to group health plans covering less than two current employees as of the first day of the plan year. Thus, an arrangement covering only a single employee (whether or not that employee is a 2-percent shareholder-employee) generally is not subject to the market reforms, whether or not the reimbursement arrangement otherwise constitutes a group health plan. However, if an S corporation maintains more than one of these types of arrangements for different employees (whether or not 2-percent shareholder-employees), all are treated as a single arrangement covering more than one employee, so that this exception does not apply.
This guidance also does not apply to reimbursements of individual health insurance coverage with respect to employees of an S corporation who are not 2-percent shareholders.
Employer Payment Plans and Tax Deductibility of Premium Reimbursements
Prior guidance under Revenue Ruling 61-146 that excludes employer reimbursements of an employee’s individual insurance premiums from gross income under Code Section 106 continues to apply. However, this means only that the payments would be excludable from the employee’s gross income (regardless of whether the employer includes the payments as wages on the Form W-2). The arrangement is still subject to the ACA’s market reform rules applicable to group health plans, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. As the employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, they do not comply with the ACA.
Notice 2015-17 is available at http://www.irs.gov/pub/irs-drop/n-15-17.pdf.
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