Insurance roulette: employer payment plans advisory--watch out for penalties.

• Author: McBride, Gary
• Position: Healthcare taxation

IRS Notice 2015-17, published Feb. 18, 2015, offers temporary relief from the excise tax penalty in Sec. 4980D, through June 30, 2015, for employers that reimburse employees for the cost of individual health insurance premiums. This notice also provides temporary relief, through 2015, for reimbursement arrangements involving the more than 2 percent S shareholders, and clarifies other issues relating to health reimbursement arrangements and the related excise tax penalty.

The Small Business Healthcare Relief Act of 2015 (H.R. 2911 and S. 1697, July 7, 2015), would eliminate the need for relief by allowing small employers, free of penalties, to help employees purchase a health plan on the individual market, and establish tax-favored, stand-alone health reimbursement arrangements. The proposed legislation's fate is unpredictable.

Background

Several points must be understood to make sense of Notice 2015-17, as well as the desirability of legislative relief.

* Pursuant to the Affordable Care Act (ACA), employers with 50 or more full-time (including full-time equivalent) employees must provide health insurance or pay an excise tax (Sec. 4980H). The ACA does not require small employers to provide any health coverage to employees and does not penalize small employers for failing to do so. However, if the small employer does provide a group health plan to employees, then that plan must meet the ACA market reforms or the employer is subject to an excise tax of $100 per employee, per day (Sec. 4980D)--not counting the additional 5 percent penalty if the employer fails to file Form 8928 admitting liability for the Sec. 4980D tax.

* Historically, many small employers, rather than providing a company group health insurance plan, have reimbursed all or a portion of the cost of their employees' individual insurance premiums. Such arrangements are income tax favored. Rev. Rul. 61-146 holds if certain, easily satisfied conditions are met, an employer reimbursement for non-employer sponsored health insurance is excludible from the employee's gross income under Sec. 106. The ACA does not change Rev. Rul. 61-146 or the Sec. 106 exclusion.

* The ACA change--the big problem for small employers--was first announced in Notice 2013-54 (Sept. 13, 2013). An arrangement in which an employer provides reimbursements for the purchase of major medical coverage in an individual market health insurance policy (inside or outside of the exchange), or directly pays the premium, is itself a group health plan provided by the...