On February 18, 2015, the Internal Revenue Service (“IRS”), in consultation with the United States Department of Labor and Health and Human Services, issued new guidance that provides transition relief for certain employers that reimburse their employees for the cost of premiums for individual health insurance policies. The guidance, which was issued in the form of Notice 2015-17 (the “Notice”), also provides healthcare reform compliance information for other arrangements, including arrangements that provide health benefits to 2-percent shareholder-employees of S corporations, provide Medicare and TRICARE reimbursement arrangements, and increase employees’ compensation to help pay for the cost of individual health insurance policies.
In 2013, the IRS issued Notice 2013-54, which generally provided that when an employer reimburses an employee for his or her individual health insurance premium costs, or directly pays an insurance company premiums for an employee’s individual health insurance policy, the employer has created an “Employer Payment Plan” that is a group health plan for purposes of the Patient Protection and Affordable Care Act, as amended (the “ACA”). Notice 2013-54 states that Employer Payment Plans will fail to comply with certain parts of the ACA, such as the prohibition on annual limits on an individual’s benefits and preventive health service requirements (the “Market Reforms”). Notice 2013-54 provided that employers who failed to comply with the Market Reforms may be subject to an excise tax under Section 4980D of the Internal Revenue Code of 1986, as amended (the “Code”). Section 4980D generally imposes an excise tax of $100 per day with respect to each individual to whom the failure relates.
Excise Tax Transition Relief for Small Employers
The Notice provides limited transition relief from the Section 4980D excise tax for certain small employers that offer an Employer Payment Plan. To be eligible for the transition relief, an employer must not be an “applicable large employer,” which generally means an employer that employed an average of at least 50 full-time employees (including full-time equivalents) on business days during the preceding calendar year.
For small employers, the Section 4980D excise tax will not be asserted for a failure to comply with the Market Reforms by Employer Payment Plans that pay or reimburse employees for individual health insurance policy premiums or Medicare Part B or Part D premiums for the following time periods:
- For 2014, for employers that were not applicable large employers for 2014
- For January 1 through June 30, 2015, for employers that are not applicable large employers for 2015
Additionally, small employers that are eligible for this transition relief are not required to file Form 8928 solely because of the Employer Payment Plan for the period for which the employer is eligible for the relief.
After June 30, 2015, small employers may be liable for the Section 4980D excise tax. It is important to note that this relief does not apply to stand-alone health reimbursement arrangements (“HRAs”) or other arrangements that reimburse employees for medical expenses other than insurance premiums.
Treatment of S Corporation healthcare Arrangements for 2-Percent Shareholder-Employees
The Notice explains the tax treatment of an S corporation paying for or reimbursing 2-percent shareholders for the cost of individual health insurance premiums (a “2-Percent Shareholder-Employee healthcare Arrangement”). The IRS stated that until additional guidance is issued, and through the end of 2015, the IRS will not assert a Section 4980D excise tax for any failure of a 2-Percent Shareholder-Employee healthcare Arrangement to satisfy the Market Reforms. Additionally, unless and until additional guidance is published, an S corporation with a 2-Percent Shareholder-Employee healthcare Arrangement is not required to file Form 8928 solely because of such arrangement.
Medicare Premium Reimbursements and TRICARE Reimbursements
The Notice provides that an arrangement under which an employer directly pays or reimburses some or all of the Medicare Part B or Part D premiums for employees constitutes an Employer Payment Plan. If such arrangement covers two or more active employees, the arrangement is a group health plan that is subject to the Market Reforms. An Employer Payment Plan may not be integrated with Medicare coverage to satisfy the Market Reforms. However, the Notice establishes conditions under which an Employer Payment Plan that pays or reimburses Medicare Part B or Part D premiums can be integrated with another group health plan for purposes of the Market Reforms. The Notice provides similar treatment for arrangements under which an employer reimburses or directly pays some or all of the medical expenses for employees covered by TRICARE.
In response to Notice 2013-54, rather than risk an excise tax for sponsoring an Employer Payment Plan, many employers decided to increase employees’ after-tax compensation so that such employees would be able to purchase their own individual health insurance coverage. The Notice provides important guidance on this practice. The IRS stated that if an employer increases an employee’s compensation and does not require that the additional compensation be used to purchase health insurance coverage, then the arrangement is not an Employer Payment Plan, is not considered a group health plan, and is not subject to the ACA. However, any requirement that an employee use such increased compensation to purchase health coverage would likely make the arrangement an Employer Payment Plan, subject to the Section 4980D excise tax.
After-Tax Employer Payment Plans
The Notice addresses the question of whether an Employer Payment Plan may be offered on an after-tax basis to avoid it being treated as a group health plan. The IRS indicated that offering an Employer Payment Plan on an after-tax basis does not affect the arrangement’s status as a group health plan and that an after-tax Employer Payment Plan will still be subject to the Market Reforms.
Small employers that have Employer Payment Plans should modify such plans before June 30 so as to avoid the possibility of an excise tax under Section 4980D. Similarly, employers that reimburse employees for Medicare Part B or Part D premiums or medical expenses for employees covered by TRICARE should review such arrangements to determine whether they constitute an Employer Payment Plan. Employers with Medicare Part B or D premium reimbursement arrangements (or similar TRICARE arrangements) should also consider integrating such arrangements with the employer’s group health plan.
If you have any questions regarding the Patient Protection and Affordable Care Act or your health and welfare plans, please contact your Kutak Rock LLP attorney or a member of our Employee Benefits Practice Group.