Transition Relief and Guidance for Small Employers with Health Reimbursement Plans

The IRS has provided transition relief and guidance for employers that reimburse employees for the cost of individual health coverage. Employer group health plans must abide by a number of rules, including the market reform rules adopted by the Affordable Care Act. Many small employers were shocked to learn last year that employee payment plans, under which they reimbursed their employees for the cost of obtaining individual health insurance, violated certain Affordable Care Act rules, and that they risked a $100 per day per affected employee excise tax under Code Sec. 4980D if they continued using such an arrangement starting in 2014. This latest guidance offers transition relief, and clears up some confusion arising from previous IRS guidance.

Transition relief for 2014 and half of 2015

The Code Sec. 4980D excise tax will not be asserted for any failure to satisfy the 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 for employers that are not Applicable Large Employers (ALEs) for 2014. Relief extends from January 1 through June 30, 2015, for employers that are not ALEs for 2015. After June 30, 2015, such employers may be liable for the excise tax. ALE status is determined under the employer mandate rules.

S corporations

The IRS is contemplating further guidance with respect to 2-percent employee-shareholders of S corporations. Until such guidance is issued (and in any event through the end of 2015), the excise tax under Code Sec. 4980D will not be asserted for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement, and an S corporation with a 2-percent shareholder-employee healthcare arrangement will not be required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans) solely as a result of having a 2-percent shareholder-employee healthcare arrangement. Furthermore, Notice 2008-1, I.R.B. 2008-2, 1, continues to apply regarding the tax treatment of health insurance premium reimbursement plans for 2-percent shareholders, which means the premium reimbursements paid in wages are deductible by the shareholder. Finally, if an employee (including a 2-percent shareholder-employee) is covered under a reimbursement arrangement with other-than-self-only coverage (such as family coverage), and another employee is covered by that same coverage as a spouse or dependent of the first employee, the arrangement would be considered to cover only the one employee and hence not be subject to the group health plan requirements.

After-tax arrangements

Employers may raise the compensation of their employees to assist in the purchase of individual health insurance without being subject to the group health plan requirements at all, as long as they do not condition the compensation on obtaining health insurance. However, employers that reimburse employees for the cost of individual coverage cannot escape the group health plans rules by paying the benefits as taxable compensation.

Government programs

An arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees is an employer payment plan subject to the market reforms if it covers two or more active employees. Such an arrangement must be integrated with another group plan if it is to avoid the excise tax. Such a plan is integrated with another group health plan if: (1) the employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and offers

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Published in Tax

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