February 23, 2015

Notice 2015-17 Penalty Relief Under ACA

Notice 2015-17 Penalty Relief Under ACA

IRS issued Notice 2015-17 on February 18, 2015 providing relief for certain employers from a $100 per day per employee penalty for having plans which do not satisfy the Affordable Care Act Market Reforms.

Employers have created various programs to help employees pay for all or a portion of health insurance costs. An employer may reimburse the employee for all or a portion of the employee’s cost or make the payment of this amount directly to the insurer. Where the employer provides a group health insurance policy, this reimbursement is nontaxable to the employee. Additionally, the group health insurance policy is viewed together with the employer’s reimbursement program to satisfy the ACA market reforms (generally no annual limits and provision of preventative care).

However an employer reimbursement program creates a significant problem where it is reimbursing the employee for the cost of individual health insurance. In this situation, the reimbursement program is not considered with the health insurance but is treated as a separate group health plan. As a stand-alone plan, it cannot satisfy the market reform requirements and the employer is potentially subject to a $100 per day ($36,500 annual) penalty. A prior IRS and Department of Labor bulletins implied that treating the reimbursement as taxable income would eliminate the penalty. However, guidance issued by the DOL and IRS at the end of last year indicates that the penalty would still apply even if the reimbursements were taxed to the employees. The penalty can be avoided only where the employer payment is not conditioned on the purchase of health insurance by the employee. This position raises some technical questions on the treatment of 2% or more shareholder-employees of S corporations.

Due to the confusion caused by the prior guidance, IRS has provided limited relief in the new Notice.

  1. An employer who is not an Applicable Large Employer (did not have at least 50 full-time employees, including full-time equivalent employees in the prior year) will not be subject to the $36,500 penalty for 2014 and for the period January 1, 2015 through June 30, 2015. While Applicable Large Employer status for a year is normally based on the prior calendar year, the Notice permits employers to select a period of six or more consecutive calendar months to make the determination. This can assist employer get under the 50 employee threshold.
  2. The penalty will not apply to reimbursement plans for S corporation 2% or more shareholder-employees at least through the end of 2015. IRS will have to issue additional guidance for the penalty to apply thereafter.
  3. A special rule is provided to exempt a program reimbursing employees for all or a portion of Medicare Part B or D premiums.

The Notice does not provide relief to Applicable Large Employers. Additionally, those who are not Applicable Large Employers are eligible for relief from the penalty only through June 30, 2015. Ultimately, all employers must review their health reimbursement programs to insure compliance with these rules.

A special thanks to article contributor Michael D’Addio, Principal, Tax & Business Services.