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Category: Articles

mayAs published in The Self-Insurer, May 2015

Some much anticipated guidance and some temporary relief, has been received from the IRS recently in the form of Notice 2015-17. IRS Notice 2015-17 elaborates on the IRS’s position with regard to the application of Code Section 4980D to certain types of reimbursement arrangements. Code Section 4980D of the Internal Revenue Code sets forth the excise tax, above and beyond the ‘pay or play’ penalties, that may apply to failures by an employer sponsored group health plan to comply with specific coverage mandates and prohibitions as set forth in the Patient Protection Affordable Care Act (PPACA).

The Notice reiterates previous guidance that employer payment plans are group health plans and therefore subject to the market reforms set forth in the PPACA. Employer payment plans, as referenced in Notice 2013-54, refer to any arrangement whereby employers reimburse employees for some or all of the premium expenses incurred for an individual health insurance policy or directly pay premium expenses for an individual health insurance policy.

Notice 2015-17 was released in late February of this year to supplement and clarify some of the vagueness associated with Notices 2013-54 and 2013-40 that were released two years ago. The new guidance applies to: transition relief for small employers from the applicable excise tax under Code Section 4980D; payment plans established by S-Corps for employees who also hold 2% or more in shares; Medicare premium reimbursement arrangements; TRICARE related HRAs; salary increases to assist employees with coverage in the marketplace; and tax treatment of employer payment plans.

Transition Relief for Small Employers

It has not been uncommon for certain employers to offer reimbursement of health care costs to their employees, or at least certain employees. In Notice 2013-54, the IRS held that these employer payment plans are not in compliance with PPACA and employers will therefore be subject to an excise tax until compliance is established. These employers will also be required to file IRS Form 8928, essentially detailing their violations (self-reporting requirement).

However, this latest notice from the IRS gives small employers only a very welcome transitional relief until June 30, 2015, providing them extra time to essentially eliminate the varied employer payment plans and replace them with an option that complies with PPACA and avoid any tax consequence and the self-reporting requirement. Please Note: This transition relief does not apply to Applicable Large Employers (ALEs).

According to the regulators, a suitable alternative, the SHOP Marketplace, is up and running for small employers. The IRS realizes that these changes take a significant amount of time to understand, let alone implement and are holding off on the penalty phase to allow small employers to transition. Unless we hear otherwise, beginning July 1, 2015, full enforcement of this provision of PPACA will become effective and small employers will be treated as the ALEs are being treated today.

Treatment of S-Corporations

As it currently stands, if an S-Corp pays or reimburses premiums for individual health care coverage of an employee who is also a 2% or more shareholder, the payment counts as income, but this amount is deductible under Code Section 162(l).

The IRS mentions in Notice 2015-17 that “[t]he Departments are contemplating” whether or not to make this particular activity subject to any market reforms. For the moment a (quick) sigh of relief may be in order, as least through the end of 2015, as they’ve acknowledged no excise tax will be assessed for failure to satisfy the market reforms simply because they have this 2% shareholder-employee healthcare arrangement.

The Notice reiterates the single-employee exception under Code Section 9831(a)(2), which provides that if a group health plan has fewer than two participants who are current employees on the first day of the plan year, it generally is not subject to market reforms. The IRS mentions this to set the foundation for its clarification that if an S-Corp has more than one employee and a healthcare reimbursement arrangement is available for each employee, even if only one of those employees is a 2% shareholder, the reimbursement arrangement for the employees actually constitutes a group health plan subject to market reforms.

The IRS goes on to state that if an employee is covered as a spouse or dependent of another employee, the arrangement would be considered as covering only one employee. (For example, if an employer has two employees and has implemented a healthcare reimbursement arrangement for both, they get a two-for-one deal so long as one employee is covered under the plan of the other as a spouse or dependent).

Medicare Premium Reimbursement Arrangements

Under Notice 2013-54, reimbursement or payment by an employer for Medicare Part B and/ or D (all or in part) premiums are considered employer payment plans. Additionally, these employer payment plans cannot be integrated with Medicare in hopes of complying with PPACA because Medicare is not considered a group health plan. If an employer payment plan is set up for more than two employees, the employer again has a situation where a group health plan is formed and is subject to market reforms.

However, Notice 2015-17 ensures employers that under certain circumstances, employer payment plans that reimburse Medicare Part B and/or D premiums are considered integrated with a group health plan and therefore permissible if:

  1. The employer offers a group health plan (other than the employer payment plan and/or excepted benefit coverage only) to the employee that provides minimum value;
  2. The participating employee is actually enrolled in Medicare Parts A and B;
  3. The employer payment plan is available only to those enrolled in Medicare Part A and Part B or Part D; and
  4. The employer payment plan limits reimbursement to Medicare Part B or Part D premiums and excepted benefits, including Medigap premiums.

Please Note: The Medicare Secondary Payer Regulations still apply.


Similarly, for integration purposes, an employer payment plan cannot be integrated with TRICARE in hopes of complying with PPACA because TRICARE is not considered a group health plan. Payments or reimbursements made by an employer for some or all of the medical expenses for employees covered by TRICARE will be considered a Health Reimbursement Account (HRA) and subject to market reforms if covering two or more active employees. Notice 2015-17 provides, however, the HRA arrangement will satisfy the market and healthcare reforms under the following conditions:

  1. The employer offers a group health plan (other than the HRA and/or excepted benefit coverage only) to the employee that provides minimum value;
  2. The employee is actually enrolled in TRICARE;
  3. The HRA is only available to those enrolled in TRICARE; and

4. The HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums. Please Note: Similar to the Medicare Secondary Payer Regulations, employers are prohibited from offering incentives to employees to decline employer-sponsored group health coverage.

Salary Increases for Employees

In an attempt to circumvent many of the issues set forth above, employers have been increasing salaries for their employees in an effort to assist in the payment of coverage in the individual market. However, according the Notice 2015- 17, this type of arrangement will not be considered an employer payment plan if and only if the increase in salary is not dependent upon the employee purchasing coverage. If the employer demands proof of purchase or pays for the coverage directly, however, that action does constitute an employer payment plan.

Tax Treatment Revenue Ruling

61-146 allows, under certain conditions, the reimbursement of premiums (directly or indirectly) for non-employer sponsored coverage to be excluded from the employee’s gross income. However, it is important to remember that this Revenue Ruling has a narrow focus. As set forth in Notice 2015-17, arrangements whereby employers are providing reimbursements and/ or payments (pre or post tax) will likely be considered employer payment plans, group health plans and therefore subject to the market reform provisions of PPACA as well as the potential excise tax under Code Section 4980D.

This article is intended for general informational purposes only. It is not intended as professional counsel and should not be used as such. This article is a high-level overview of regulations applicable to certain health plans. Please seek appropriate legal and/or professional counsel to obtain specific advice with respect to the subject matter contained herein.