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Small employers are provided transition relief from ACA’s Code Sec. 4980D excise tax

Notice 2015-17, 2015-10 IRB

In a Notice, IRS has provided limited transition relief from the assessment of the excise tax under Code Sec. 4980D for small employers (i.e., employers who are not applicable large employers (ALEs)) who reimburse or pay a premium for an individual health insurance policy for an employee. The Notice also addresses other topics, including: a) the treatment, for federal tax and for market reform purposes, of arrangements reimbursing premiums of 2% S corporation shareholder-employees; and b) the application of the Affordable Care Act (ACA) market reform provisions to certain employer arrangements to fund Medicare premium payments or to provide a TRICARE-related health reimbursement arrangement (HRA).

Background. The ACA added ERISA § 715(a)(1) and Code Sec. 9815(a)(1) to incorporate the provisions of part A of title XXVII of the Public Health Service Act (PHSA) into ERISA and the Code, and make them applicable to group health plans and to health insurance issuers providing health insurance coverage in connection with group health plans. The PHSA sections incorporated by this reference are sections 2701 through 2728 (i.e., the market reform). An excise tax is imposed on failures to meet these requirements. (Code Sec. 4980D)

Transition relief for small employers. As noted in Notice 2013-54, 2013-40 IRB 287, small employers that offered their employees health coverage through arrangements that constitute an “employer payment plan” will owe a Code Sec. 4980D excise tax if they fail to comply with the market reforms provisions. However, because the Small Business Health Options Program (SHOP) Marketplace is still transitioning, and the transition by eligible employers to SHOP Marketplace coverage or other alternatives will take time to implement, Notice 2015-17 provides that the Code Sec. 4980D excise tax will not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for individual health policy premiums or Medicare part B or Part D premiums (1) for 2014 for employers that are not ALEs for 2014, and (2) for January 1 through June 30, 2015 for employers that are not ALEs for 2015. After June 30, 2015, such employers may be liable for the Code Sec. 4980D excise tax.

For this purpose, an ALE generally is, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year (see Reg. § 54.4980H-1(a)(4)). In determining whether an employer was an ALE for 2014 and 2015, an employer may determine its status as an ALE 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 (rather than by reference to the entire 2013 calendar year and the entire 2014 calendar year).

Employers eligible for this relief that have employer payment plans aren’t required to file IRS Form 8928 (Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code)—for failures to satisfy requirements for group health plans under chapter 100 of the Code, including the market reforms—solely as a result of having the arrangements for the period for which the employer is eligible for the relief. IRS states that this relief does not extend to stand-alone health reimbursement arrangements (HRAs) or other arrangements to reimburse employees for medical expenses other than insurance premiums.

Treatment of 2% S corporation shareholder-employees. As stated in Notice 2008-1, 2008-2 IRB 1, if an S corporation pays for or reimburses premiums for individual health insurance coverage covering a 2% shareholder (as defined in Code Sec. 1372(b)(2)), the payment or reimbursement is included in income, but the 2% shareholder-employee may deduct the amount of the premiums under Code Sec. 162(l), if its other requirements are met. (Notice 2015-17 refers to this type of arrangement as a 2% shareholder-employee healthcare arrangement.) Notice 2015-17 provides that until contemplated guidance is issued, and in any event through the end of 2015, the Code Sec. 4980D excise tax will not be asserted for any failure to satisfy the market reforms by a 2% shareholder-employee healthcare arrangement.

Unless and until additional guidance provides otherwise, an S corporation with a 2% shareholder-employee healthcare arrangement will not be required to file Form 8928 solely as a result of having a 2-percent shareholder-employee healthcare arrangement. This guidance doesn’t apply to reimbursements of individual health insurance coverage with respect to employees of an S corporation who aren’t 2% shareholders. Further, unless and until additional guidance provides otherwise, taxpayers may continue to rely on Notice 2008-1 for the tax treatment of such arrangements for all federal income and employment tax purposes. To the extent that a 2% shareholder is allowed both a Code Sec. 162(l) deduction and a Code Sec. 36B premium tax credit, the computation method under Rev Proc 2014-41, 2014-33 IRB 364, applies.

IRS also notes that Code Sec. 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. So, an arrangement covering only a single employee (whether or not that employee is a 2% shareholder-employee) generally isn’t subject to the market reforms whether or not such a reimbursement arrangement otherwise constitutes a group health plan. However, multiple such arrangements covering different employees are treated as a single arrangement covering more than one employee so that the Code Sec. 9831(a)(2) exception doesn’t apply.

Medicare premium reimbursement arrangements. Notice 2015-17 provides that an arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees constitutes an employer payment plan, as described in Notice 2013-54, and if such an arrangement covers two or more active employees, it is a group health plan subject to the market reforms. An employer payment plan may not be integrated with Medicare coverage to satisfy the market reforms because Medicare coverage is not a group health plan.

However, an employer payment plan that pays for or reimburses Medicare Part B or Part D premiums is integrated with another group health plan offered by the employer for purposes of the annual dollar limit prohibition and the preventive services requirements if (1) 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; (2) the employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B; (3) the employer payment plan is available only to employees who are enrolled in Medicare Part A and Part B or Part D; and (4) the employer payment plan is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums. IRS notes that an employer payment plan that has fewer than two participants who are current employees (for example, a retiree-only plan) on the first day of the plan year is not subject to the market reforms and, so, integration is not necessary to satisfy the market reforms.

Caution: IRS cautions that, to the extent such an arrangement is available to active employees, it may be subject to restrictions under other laws such as the Medicare secondary payer provisions.

Similarly, an arrangement under which an employer reimburses (or pays directly) some or all of medical expenses for employees covered by TRICARE (for eligible active and retired service members) constitutes an HRA, and, as provided in Notice 2013-54, if such an arrangement covers two or more active employees, is a group health plan subject to the market reforms. An HRA may not be integrated with TRICARE to satisfy the market reforms because TRICARE is not a group health plan for integration purposes.

However, an HRA that pays for or reimburses medical expenses for employees covered by TRICARE is integrated with another group health plan offered by the employer for purposes of the annual dollar limit prohibition and the preventive services requirements if: (1) 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; (2) the employee participating in the HRA is actually enrolled in TRICARE; (3) the HRA is available only to employees who are enrolled in TRICARE; and (4) the HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.

Caution: IRS notes that, to the extent such an arrangement is available to active employees, employers should be aware of laws that prohibit offering financial or other incentives for TRICARE-eligible employees to decline employer-provided group health plan coverage, similar to the Medicare secondary payer rules.

Increased employee compensation to pay individual market coverage. Notice 2015-17 provides that where an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance), the arrangement isn’t an employer payment plan. In addition, because the arrangement generally will not constitute a group health plan, it is not subject to the market reform provisions. IRS also notes that providing employees with information about the Marketplace or the Code Sec. 36B premium tax credit is not endorsement of a particular policy, form, or issuer of health insurance.

Employer payment plan as taxable compensation. As noted in Notice 2013-54, the payment arrangement described in Rev Rul 61-146, 1961-2 CB 25 is an employer payment plan. An arrangement under which an employer provides reimbursements or payments that are dedicated to providing medical care, such as cash reimbursements for the purchase of an individual market policy, is itself a group health plan. Accordingly, the arrangement is subject to the market reform provisions applicable to group health plans without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, so, will fail to satisfy PHSA section 2711 (annual limit prohibition) and section 2713 (requirement to provide cost-free preventive services) among other provisions.

Rev Rul 61-146 does not address the application of the market reform provisions and shouldn’t be read as containing any implication regarding the application of these market reforms. Rev Rul 61-146 holds that under certain conditions, if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income under Code Sec. 106. This exclusion also applies if the employer pays the premiums directly to the insurance company. The holding in Rev Rul 61-146 continues to apply, meaning only that such payments under these arrangements are excludable from the employee’s gross income under Code Sec. 106 (regardless of whether the employer includes the payments as wage payments on the Form W-2).

References: For treatment of PHSA group health plan and health insurance issuer provisions as if included in the Code, see FTC 2d/FIN ¶  H-1325.60; United States Tax Reporter ¶  98,154.

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