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Update – Employer Reimbursements of Individual Health Policy Premiums Temporary Relief Issued for Small Employers – until June 2015 And IRS clarifies reimbursement rules for 2% Sub S shareholders and for Medicare & Medigap premiums & TRICARE uncovered expenses

February 19, 2015 Business & Tax Blog Employment Law

Small Employer Relief Until June 30, 2015

In November we alerted you that employers that reimburse employees for the cost of purchasing individual health insurance policies risk being subject to ACA penalties of $36,500 per year per person. Here is a link to our prior alert:

On February 18, 2015, the IRS issued temporary relief for small employers (those that don’t qualify under the ACA as an “applicable large employer”) from these enormous penalties. The temporary relief ends June 30, 2015.

Under the soon to be published IRS notice (Notice 2015-17), small employers that aren’t classified as “applicable large employers” will not be hit with the ACA $36,500 per person penalty for either 2014 or for the period from January 1, 2015, through June 30, 2015. Starting July 1, 2015, the penalties will apply, so almost all employers need to stop premium reimbursement policies to avoid penalties.

To be eligible for the temporary relief, an employer is considered a small employer if it does not employ an average of 50 or more full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. An employer’s small employer status is looked at separately for 2014 and 2015 for purposes of this temporary relief.

An employer that qualifies for the temporary relief does not need to file Form 8928 reporting failure to satisfy the mandates of providing ACA compliant coverage for the period that the employer is eligible for the relief.

Reimbursement of 2% Sub-S Shareholders

The new IRS notice also provides relief or clarification for employer health premium reimbursements provided to 2% Sub S shareholders. Until further guidance is published by the IRS, and in all events through the end of 2015, health insurance premium reimbursements to 2% Sub S shareholders will not trigger the $36,500 ACA penalties.

The exception for 2% Sub S shareholders does NOT apply to reimbursements provided to other employees of the Sub S employer. As a result, reimbursements to the non-2% Sub S shareholder/employees will trigger the ACA penalties (but may be temporarily suspended until June 30, 2015, if the employer is not an applicable large employer – see above).

Reimbursement of Medicare, Medigap and/or TRICARE Premiums

The IRS notice also addresses employer arrangements that reimburse employees for Medicare, Medigap and TRICARE premiums. The IRS notes that the reimbursement of Medicare premiums by an employer may violate the Medicare secondary payer rules which are not tax rules but impose severe penalties. On the tax side, the IRS advises that an employer program that reimburses Medicare, Medigap or TRICARE premiums (or uncovered medical expenses) without the employer offering the employee coverage under an employer-sponsored minimum value health plan will trigger the $36,500 per person per year penalty. The exception that allows an employer to reimburse the Medicare, Medigap or TRICARE premiums (or medical expenses) without triggering the ACA $36,500 penalty requires the employer to offer employer health coverage and comply with a number of other very specific requirements. For more information, give us a call or email.

Carol L. Myers