IRS Notice 2015-17: Limited Relief for Payment Plan Violations
The IRS has long held the position that, subject to narrow exceptions, an employer violates the Affordable Care Act’s (ACA’s) annual dollar limit and preventive services mandates by reimbursing or paying employee premiums for individual health insurance. This is because such “employer payment plans” are treated as separate group health plans that impose prohibited limits but cannot be integrated with the individual policy coverage.
After articulating this position in Notice 2013-54, the IRS has repeated it in Q&As, FAQs and information letters — emphasizing the severe excise tax consequences of violating these mandates. Now the agency has issued Notice 2015-17, also written in Q&A format, which covers some new ground by providing relief in limited circumstances.
Temporary transitional relief
Per Notice 2015-17, the IRS won’t impose excise taxes otherwise assessable under the ACA’s shared-responsibility (or “play or pay”) provision for employer payment plans maintained in 2014 or the first six months of 2015 (specifically, through June 30, 2015) by small employers — that is, those not defined as large employers under the ACA. Employers eligible for the relief are also excused from the requirement to self-report these violations on Form 8928.
Under the ACA, a large employer is one with at least 50 full-time employees or a combination of full-time and part-time employees that’s equivalent to at least 50 full-time employees. This involves totaling part-time employees’ monthly hours and dividing that figure by 120 to calculate full-time equivalent employees (FTEs). That figure is then added to the total number of actual full-time employees. A full-time employee generally is someone employed on average at least 30 hours a week, or 130 hours in a calendar month.
Importantly, the relief doesn’t apply to stand-alone Health Reimbursement Arrangements (HRAs) or other arrangements to reimburse any expenses other than insurance premiums. Therefore, it appears that the IRS does expect large employers with employer payment plans to file Form 8928 for violations. Also, Notice 2015-17 doesn’t extend relief to “midsize” employers — those with 50 to 99 full-time employees or the equivalent, a group that technically falls within the ACA’s “large employer” definition but is excused from play-or-pay penalties for 2015 under certain conditions.
Pending S corporation guidance
Notice 2015-17 also addresses “2% shareholder-employee health care arrangements.” Under these arrangements, an S corporation pays for or reimburses premiums for individual health insurance coverage for a “2% shareholder” (generally, employees owning more than 2% of the corporation’s stock), whereby the payment or reimbursement is included in income and the premiums are deductible by the 2% shareholder-employee.
Pending the issuance of additional guidance on these arrangements, Notice 2015-17 provides that an S corporation won’t be subject to the play-or-pay provision or required to file Form 8928 solely as a result of having a 2% shareholder-employee health care arrangement. This relief doesn’t apply to employees who aren’t 2% shareholders — though the temporary relief for small employers, as described above, may apply.
S corporations and their advisors will want to read this relief carefully and watch for future guidance. The Notice also clarifies that a plan covering only one individual as an active employee — even if it covers other employees as that employee’s dependents — is generally not a group health plan subject to the annual limit and preventive services mandates. Notably, there’s no mention of partnerships, which often maintain similar arrangements. But they may be addressed in anticipated additional guidance.
Medicare premium reimbursement arrangements
For purposes of complying with the annual limit and preventive services mandates, Notice 2015-17 permits an employer’s reimbursement of Medicare Part B or Part D premiums to be integrated with another group health plan offered by the employer. But this is permissible only if:
- The employer offers a group health plan (other than the premium reimbursement arrangement) to the employee that doesn’t consist solely of excepted benefits and offers coverage providing minimum value,
- The employee participating in the premium reimbursement is enrolled in Medicare Parts A and B,
- Premium reimbursement is available only to employees who are enrolled in Medicare Part A and Part B or Part D, and
- Reimbursement is limited to Medicare Part B or Part D premiums and premiums for excepted benefits, including Medigap premiums.
The Notice cautions that this kind of Medicare premium reimbursement arrangement for active employees may be subject to restrictions under other laws, such as the Medicare Secondary Payer (MSP) provisions.
For example, reimbursing Medicare premiums may violate the MSP provision that prohibits employers from incentivizing Medicare-eligible individuals to not enroll in the employer’s group health plan. Thus, this relief may be limited to employers that fall within an MSP exception, such as that available for certain small employers.
If the integration criteria aren’t met, the arrangement will presumably violate the mandates in question, unless other relief applies. Note that retiree-only arrangements — in which not more than one active employee participates — aren’t subject to these mandates and don’t need the relief provided under Notice 2015-17.
Notice 2015-17 confirms that an employer may increase an employee’s taxable compensation, not conditioned on the purchase of health coverage, without creating an employer payment plan (or any group health plan at all).
In addition, the IRS has clarified that after-tax employer payment plans are subject to excise tax. The Notice reiterates the agency’s previously expressed position that an employer’s payment or reimbursement of employees’ individual health insurance premiums is a group health plan subject to the market reforms even if the payments or reimbursements are made on an after-tax basis.
The Notice also states that the Department of Labor and Department of Health and Human Services have reviewed and expressed their agreement with Notice 2015-17. Additional clarifications on other aspects of employer payment plans and HRAs are expected in the near future.
Next steps forward
The IRS has gone out of its way to emphasize — repeatedly — the compliance problems and potential excise taxes posed by paying or reimbursing employees’ individual insurance premiums (or reimbursing medical expenses other than through an integrated HRA). And, no doubt, the transitional relief provided here is welcomed by small employers.
Large employers, however, still face stiff penalties for noncompliance. The IRS expects employers with 50 or more full-time employees or the equivalent to either discontinue employer payment plans or self-report their violations and pay excise taxes. And while Notice 2015-17 refers to all of the relief as “transitional,” it doesn’t specify any durational limit for the Medicare or TRICARE relief. Plan sponsors with any type of individual premium-payment arrangement (or nonintegrated expense reimbursement arrangement) should consult with their benefits advisors and legal counsel to determine the next steps forward.