In response to comments and concerns raised by small businesses about the tax treatment of certain health coverage arrangements, the IRS released Notice 2015-17 on Feb. 18, which is welcome news for many employers. This notice addresses small employers who do not offer healthcare coverage, but do reimburse employees for the cost of their premiums when those employees purchase healthcare coverage on their own.
The primary purpose of Notice 2015-17 is to provide certain transition relief, involving the use of employer payment plans and health reimbursement accounts (HRA) including tax treatment for reimbursement of premiums for individual coverage owned by 2 percent shareholder-employees of subchapter S corporations.
The Notice reiterates the conclusion reached by the Department of Labor (DOL) in November guidance that “employer payment plans” are group health plans that fail to comply with the market reforms applicable to group health plans under the Affordable Care Act (ACA). In that respect, nothing has changed and this newly issued guidance must be read with the earlier guidance in mind. Below are the main points of the Notice.
1. Small employers who reimburse through the use of employer payment plans
For small employers who reimbursed employees for premiums paid on individual health coverage, and are not applicable large employers (ALEs) in 2014, the $100 per day per employee excise tax will not be assessed for that year. In addition, from Jan. 1 to June 30, 2015, the excise tax will not be assessed for those employers who are not ALEs. An ALE is an employer with fewer than 100 full-time or full-time equivalent (FTE) employees in 2014 (50 in 2015). For small employers that have reimbursed employees for self-purchased health coverage, the Notice confirms these reimbursements are not taxable in 2014. Since this Notice has come out after the due date for issuing W-2s to employees, those W-2s may need to be amended.
A small employer who has reimbursed premiums on individual health coverage held by its employees may, for 2014, treat those reimbursements as a nontaxable fringe benefit. In such cases, the employer should consider issuing amended 2014 Form W-2s to its employees and, if an employee has already filed his or her 2014 Form 1040, assisting him or her in revising or amending the return. Depending on the reimbursement, this could be a significant tax savings for the employee. Keep in mind that since the amount of the reimbursement will no longer be treated as wages, FICA and FUTA paid on account of the reimbursement should be adjusted, which may result in a tax savings to the employer. Finally, the Notice has confirmed there will be no assessment of the ACA excise tax on account of reimbursement activity within the employer payment plan in 2014.
2. Application to subchapter S corporations
The DOL, the Department of Treasury, and the Department of Health and Human Services are contemplating publication of additional guidance on the application of the market reforms to 2 percent shareholder-employee healthcare arrangements. Until such guidance is issued and “in any event through the end of 2015,” subchapter S corporations with healthcare reimbursement arrangements for 2 percent shareholder-employees will not be subject to the excise tax.
The Treasury is also considering whether additional guidance is needed on the federal tax treatment of these reimbursement practices.
S corporation shareholder-employees are allowed to subtract from their adjusted gross income the amount of employer-provided health insurance premiums (if the amount was included in taxable wages). Under Notice 2015-17, this process can continue (contrary to the previously issued guidance) until further notification.
Subchapter S corporations: A subchapter S corporation which has reimbursed premiums for employee-owned individual health coverage in 2014 may continue taking an “above-the-line” deduction for the cost of the coverage which will also not be treated as wages for FICA and FUTA purposes. Unlike in the case of the small employer noted above, it would appear that for the 2015 calendar year, the guidance in Notice 2015-17 will stay intact, and, at least through 2015, it would appear that the ACA excise tax will not be assessed on account of the reimbursement.
3. Medicare premium reimbursement arrangements
The IRS stated in this Notice that an arrangement under which an employer reimburses some or all of Medicare Part B or Part D premiums constitutes an employer payment plan which normally may not be integrated with Medicare coverage to satisfy the market reforms because Medicare is not a group health plan. However, the IRS concluded that such an arrangement could be integrated with another group health plan for purposes of the annual dollar limit prohibition and preventive services requirements if certain requirements outlined in the Notice are met. The IRS also reiterated that an employer payment plan that has fewer than two participants who are current employees, such as a “retiree-only” employer payment plan, is not subject to market reforms and therefore such integration is not necessary.
If an employer reimburses Medicare B and D premium, but only for retirees, this Notice confirms that there will be no ACA violation, since integration is not necessary. If this reimbursement program is integrated with another group health plan and certain conditions are met, then the employer payment plan may be treated as meeting the ACA annual dollar limitation and the preventive services requirement.
4. TRICARE reimbursement programs
The Notice provides guidance directing when a health reimbursement account HRA that pays or reimburses medical expenses for employees covered by TRICARE, the Department of Defense healthcare program, would be considered to be “integrated” with another group plan of the employer for purposes of the annual dollar limit prohibition and the preventive services requirement. The IRS clarifies that any arrangement under which an employer reimburses TRICARE constitutes an HRA and not an employer payment plan.
If an employer reimburses for TRICARE, and the HRA is integrated with another group health plan and certain conditions are met, then the employer payment plan may be treated as meeting the ACA annual dollar limitation and the preventive services requirement.
5. Increases in employee compensation to assist with payments for individual coverage
The Notice confirms that an employer who increases an employee’s compensation but does not condition the payment of the additional compensation on the purchase of health coverage is not maintaining an employer payment plan.
Although large employers do not get the transition relief from the ACA excise tax for 2014 and through June 30, 2015, the IRS has concluded such an employer who increases an employee’s compensation but does not condition the payment of the additional compensation on the purchase of health coverage is not maintaining an employer payment plan. Therefore, presumably, a payment of additional wages, to be utilized for any purpose, but with the payment of premiums for employee individual health coverage in mind, is still an acceptable alternative for indirectly accounting for an employee’s individual healthcare expenses.
Application to large employers
Due to the emphasis placed on ACA large employer status, it is important each year to determine the number of FTE employees. This is particularly important where a business employs a small number of full-time employees and a large contingency of part-time employees.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.