Medical Insurance Premium Reimbursement — A Brief Reprieve for Small Employers

LR-stethoscope-shtrstck-highresSome employers – particularly smaller ones – have assisted their employees to obtain health insurance by reimbursing them for the cost of insurance they purchase in the individual market.  Does this practice satisfy the requirement of the Affordable Care Act?  On February 18, 2015, the Internal Revenue Service issued Notice 2015-17 (“the Notice”), which reiterates its position that employer reimbursement of health insurance premiums for policies their employees purchase in the individual market does not satisfy the market reforms of the ACA.   But the Notice also provides some welcome temporary relief for small employers from the ACAs “$100 per day per participant” penalties” (the “$100 per day Penalty”).  Find a copy of the Notice here.

Notice 2015-17 recognizes that this has been an area of great confusion for small employers.  The IRS wants to provide additional time to transition to arrangements that are compliant with the market reforms of the ACA.  Accordingly, any employer who is not an Applicable Large Employer under the ACA will not be subject to the $100 per day Penalty for 2014, or for the period between January 1, 2015 and June 30, 2015.  Presumably, effective July 1, 2015, small employers will be obligated to self-report noncompliance with the ACA if these reimbursement arrangements continue after that date.

The Notice also clarifies that the treatment of insurance premium reimbursement for 2% S Corporation Shareholder-Employees will remain the same until further guidance is issued.  Currently, S Corporations are permitted to pay or reimburse insurance premiums for 2% or greater shareholder-employees and the shareholder may deduct the amount of the premium under Code Section 162(l), provided that all other eligibility criteria for deductibility under Code Section 162(l) are satisfied. The IRS is considering whether additional guidance is needed on the federal tax treatment of 2% shareholder-employee healthcare arrangements.  Interestingly, the Notice does not address partnerships.  Perhaps this is a backhanded way of indicating that partnership reimbursement/payment of health insurance premiums for its partners does not trigger the ACA requirements.

Notice 2015-17 addresses how employers can provide ACA-compliant reimbursement of certain Medicare premiums and TRICARE supplemental premiums.  Both Medicare and TRICARE impose penalties on employers who offer financial or other incentives for Medicare or TRICARE-eligible employees to decline employer-sponsored healthcare coverage.  Accordingly, for most employers these aspects of the Notice may only be of academic interest.

Finally, in Notice 2015-17 the IRS states with absolute clarity that:

  1. Increases in employees’ compensation that are not contingent on employees using the increase to purchase healthcare insurance are okay.
  2. After-tax reimbursement of health insurance premiums for policies bought in the individual market are not okay.

The IRS viewed its prior guidance on these two issues as being crystal-clear.  Given the level of confusion among employers, the IRS has seen the benefit of using short declarative sentences.  Perhaps future ACA guidance from the IRS will be equally clear.  One can only hope.