As a reminder, the IRS, in February, issued relief guidance for small employers who reimburse employees for the cost of their premiums in lieu of offering a group health plan. Last year, the Departments of Treasury, Labor and Health and Human Services had stated employer reimbursements of employee health insurance premiums not connected with an employer-sponsored health plan would no longer be eligible for pre-tax treatment. These arrangements were found to be in violation of the ACA’s annual dollar limit prohibition. As a result, employers continuing these types of arrangements become subject to a $100 per day per employee excise tax (up to $36,500 per employee per year).
In response to concerns raised by small businesses, the IRS has offered 18 months of relief from these provisions. From Jan. 1, 2014 through June 30, 2015, small employers (non-ALEs) can continue offering reimbursement type arrangements on a pre-tax basis to assist employees with their health insurance premiums without incurring the excise tax. In other words, small employers who have reimbursed employees for self-purchased health coverage can continue to reimburse these amounts on a pre-tax basis through June 30. Please see our February tax alert, The IRS grants health coverage reimbursement relief to small employers, for more details on this guidance.
As of July 1, 2015, the reimbursement of such arrangements should cease. Employers should either begin sponsoring group health coverage that offers MEC or pay employees additional taxable compensation. Even if an employer would not otherwise be subject to the employer mandate penalties under the ACA, they could still be subject to the excise penalty on a per day, per employee basis. It appears, once the 18 month relief window expires, this penalty applies to all employers that directly reimburse employee premiums for individually obtained coverage, even if the employer employs less than 50 full-time equivalent employees.
However, S-corporation shareholders appear to have gotten the best deal under this relief guidance. Subchapter S-corporation shareholder-employees (those that own more than 2 percent of the S-corporation) are allowed to continue the historical practice of treating healthcare reimbursements as wages not subject to FICA and Medicare without causing the S-corporation to be subject to the excise tax.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
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