The continuing saga of employer reimbursement of individual health plans took another turn in IRS Notice 2015-17 which provides relief to taxpayers with arrangements in violation of Notice 2013-54.

Under Notice 2013-54 the IRS provided that, generally, employer reimbursements of individual policy premiums similar to the type provided for in Revenue Ruling 61-146 would violate provisions of the Affordable Care Act, specifically the market reform and preventive care provisions. Limited exceptions were available in certain cases, such as cases where the program covered “fewer than two” current employees as of the beginning of the plan year.

For programs not subject to such exceptions, an employer faced a $100 per day per participant penalty under IRC §4980D for each day the noncompliant plan had been maintained since January 1, 2014.

The relief provisions apply generally to:

employer payment plans, as described in Notice 2013-54, if the plan is sponsored by an employer that is not an Applicable Large Employer (ALE) under Code § 4980H(c)(2) and §§54.4980H-1(a)(4) and -2;
S corporation healthcare arrangements for 2-percent shareholder-employees;
Medicare premium reimbursement arrangements; and
TRICARE-related health reimbursement arrangements (HRAs).

Generally such programs for non-ALEs will be excused from the penalty tax under §4980D for all of 2014 and through June 30, 2015. After that the employer will be subject to the $100 per day penalty if the employer still maintains a non-compliant plan.

As the large employer rules were effectively deferred until 2015, the IRS provides the following rules for determining ALE status under this ruling:

For determining whether an entity was an ALE for 2014 and for 2015, an employer may determine its status as an applicable large employer by reference to a period of at least six consecutive calendar months, as chosen by the employer, during the 2013 calendar year for determining ALE status for 2014 and during the 2014 calendar year for determining ALE status for 2015, as applicable (rather than by reference to the entire 2013 calendar year and the entire 2014 calendar year, as applicable).

Affected employers will not be required to file Form 8928 solely due to the fact they had such arrangements during the period eligible for relief.

Additional extended relief is provided to 2% shareholders under this notice. The IRS indicates that additional guidance on the impact on 2% shareholders is expected. The ruling goes on to note:

Until such guidance is issued, and in any event through the end of 2015, the excise tax under Code § 4980D will not be asserted for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement. Further, unless and until additional guidance provides otherwise, an S corporation with a 2-percent shareholder-employee healthcare arrangement will not be required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans under chapter 100 of the Code, including the market reforms) solely as a result of having a 2-percent shareholder-employee healthcare arrangement.

The notice cautions this relief does not extend to the payment of such premiums for any non-shareholders of the S corporation.

While the IRS is considering changes to guidance on 2% shareholders, until such guidance is issued taxpayers may continue to rely on Notice 2008-1 for payroll and income tax treatments. As well, 2% shareholders who are eligible for both the self-employed health insurance deduction under §162(l) and the premium tax credit under §36B should follow the guidance in Revenue Procedure 2014-41.

In continuing to discuss S shareholder issues, the guidance provides additional information regarding the “fewer than two” employees test. The guidance notes that if an entity has more than one reimbursement arrangement for different employees, all of those arrangements are combined in determining if the “fewer than two” current employees.

That would also count if one 2% shareholder was covered and one non-2% shareholder were in such a program. While the 2% shareholder program is exempted on its own, the other employee’s coverage would trigger the penalty (at least after July 1, 2015 if the S corporation is not an ALE—and immediately if the S corporation is an ALE).

The ruling next goes on to look at Medicare and TRICARE arrangements where the premium is being reimbursed by an employer.

While the ruling holds that an employer reimbursing Medicare premiums is generally not allowed, the ruling does create a program under which such premiums will not be treated as causing a liability under §4980D for the $100 per day penalty.

Such a program reimbursing Medicare Part B and/or Part D premiums will be treated as integrated with a group plan for purposes of compliance with these rules if:

The employer offers a group health plan (other than the employer payment plan) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;
The employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B;
The employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and
The employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.

A similar option is provided to integrate TRICARE with a group plan. A plan will be compliant if:

The employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;
The employee participating in the HRA is actually enrolled in TRICARE;
The HRA is available only to employees who are enrolled in TRICARE; and
The HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.

In both cases the ruling cautions that non-tax rules may apply if such an offering covers current employees.

Q&A 4 of the notice specifically “blesses” the situation where an employer decides, upon terminating such a reimbursement plan, to increase the compensation of employees if such a pay increase is not predicated upon the employee obtaining or maintaining coverage of any sort.

Q&A 5 provides that if an employer pays or reimburses such premiums in a form that meets the requirements of Revenue Ruling 61-146, those amounts remain nontaxable to the employee and not subject to FICA.

Specifically the IRS answers “No” the question “May the reimbursements or payments under an arrangement described in Rev. Rul. 61-146 be provided on an after-tax basis and, if so, will this cause the arrangement not to be a group health plan (and accordingly not to be subject to the market reforms)?” Thus an employer who does include such payments in a W-2 as taxable compensation and FICA/Medicare wages has both filed incorrect payroll reports (including overwithholding from the employee) and has not avoided the penalties under IRC §4980D.

As the answer explains:

The holding in Rev. Rul. 61-146 continues to apply, meaning only that payments under arrangements that meet the conditions set forth in Rev. Rul. 61-146 are excludable from the employee’s gross income under Code § 106 (regardless of whether the employer includes the payments as wage payments on the Form W-2). However, Rev. Rul. 61-146 does not address the application of the market reforms and should not be read as containing any implication regarding the application of the market reforms.

So, to summarize:

Non-ALE employers will need to get their programs into compliance with these rules by June 30, 2015, but will not face penalties prior to that date
Until further notice, S corporation shareholders may continue to have individual policies reimbursed in accordance with the provisions of Notice 2008-1 and not face any penalty under §4980D
In order to reimburse Medicare or TRICARE, an employer must have the employee enrolled in a separate group insurance program and meet the other requirements noted above (although non-ALEs will have until June 30 to get such a program in place under the general relief provision)
Employer reimbursements of premiums that meet the requirements of Revenue Ruling 61-146 should not be shown as taxable wages to the employee, nor subject to payroll taxes, even if the payment is otherwise subject to the $100 per day penalty under §4980D

Advisers who have had clients attempt to “fix” such program by making such payments subject to payroll taxes or via other mechanisms should consider the need to amend filings to comply with the treatments in this ruling.

Similarly, all affected employers should take steps to get their program in compliance with the rules by the end of June or face penalties.

Finally, advisers need to watch for the promised further IRS guidance in this area and advise their clients that additional changes are likely going to come down the line.