IRS Offers Relief for Small Employer Premium Reimbursement Arrangements

Originally posted February 25, 2015 by Laura Kerekes on

On February 18, 2015, the IRS announced transition relief for certain small employers that subsidize the cost of individual health insurance policies for employees. Notice 2015-17 provides short-term relief from the $100 per employee per day excise tax that otherwise would apply to the employer.

Starting in 2014, employers of all sizes have been prohibited from making or offering any form of payment to employees for individual health insurance premiums, whether through reimbursement to employees or direct payments to insurance carriers. Employers also are prohibited from providing cash or compensation to employees if the money is conditioned on the purchase of individual health coverage. Employers that violate the prohibitions against these so-called “employer payment plans” are subject to an excise tax of $100 per day per affected employee. Exceptions are allowed for limited-scope dental or vision policies, supplemental plans, or retiree-only plans.

Small businesses in particular have been affected by the prohibition since many of them had subsidized individual policies for workers instead of offering a group health plan. Notice 2015-17 now offers short-term relief from tax penalties to give small employers additional time to comply with the prohibition. This relief applies only to small employers. Employers who are defined under the Affordable Care Act as applicable large employers (ALEs) — generally those with 50 or more full-time and full-time-equivalent employees — are not eligible for relief.

Specifically, the IRS will not impose excise taxes on employers that provide pretax reimbursement or payment of individual health insurance premiums as follows:

  • For 2014, employers that are not ALEs (based on employer size in 2013).
  • For January 1 through June 30, 2015, employers that are not ALEs (based on employer size in 2014).

Starting July 1, 2015, excise taxes may apply regardless of the employer’s size.

Note: This transition relief applies only to pretax reimbursement or payment of insurance premiums. It does not apply to after-tax reimbursements. It also does not apply to stand-alone health reimbursement arrangements (HRAs) or other arrangements to reimburse employees for expenses other than insurance premiums.

Additional Relief Provisions

Notice 2015-17 also provides relief for certain arrangements that reimburse premiums for 2-percent-or-more shareholders in Subchapter S corporations, and for certain employers that reimburse Medicare premiums or TRICARE expenses. These provisions are complex and affected employers should refer to their legal and tax advisors for guidance.

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