IRS Guidance on Health Premium Reimbursement/Payment Plans

As we have previously reported, and discussed at our Seminars, the IRS has issued a series of pronouncements concluding that the reimbursement by employers of employee-paid health premiums, or the direct payment by employers of premiums for individual health policies for employees, violates the Affordable Care Act (regardless of whether these reimbursement or direct payments are treated as tax-free or taxable) and subjects the employer to significant penalties.

The IRS just released Notice 2015-17, which provides some “limited transitional relief” from this rule for small employers. (For this purpose a small employer is an employer with fewer than 50 “employees” as measured under the complex employer mandate rules.)

The new relief provides that small employers with plans reimbursing or paying individual health policy premiums or Medicare Part B or Part D premiums will not incur ACA penalties for 2014 and for the period January 1-June 30, 2015. According to the IRS, this is intended to give small employers time (but not much time, given the June 30 deadline) to consider SHOP or other ACA-compliant employer-sponsored group health plan options that can provide the desired health benefits to their employees.

(Note that the IRS expressly stated that this limited transitional relief is for arrangements that do nothing other than reimburse or pay individual health policy premiums and/or Medicare Part B or D premiums, and is not available for stand-alone Health Reimbursement Arrangements or other approaches that reimburse employees for anything other than these premiums.)

The IRS also created a special exception for plans that reimburse or pay premiums for 2% or greater S corporation shareholders, exempting them for the applicable ACA penalties through December 31, 2015.

Although limited, this IRS relief should provide a useful compliance window for small employers and S corporations that discover they have been violating the IRS position.

Please contact us if you have any questions on this latest guidance or any other ACA matter.