On February 18, the IRS issued Notice 2015-17, which includes unexpected guidance on the topic of reimbursement of individual health insurance premiums. The Notice includes limited transition relief for small employers reimbursing individual health insurance premiums, as well as certain other defined categories of premium reimbursement.
Candidly, I am very surprised by the Notice and this most recent development in a long and winding saga for employers seeking to provide non-group benefits to current employees. This relief will help small employers that did not make previous adjustments to comply with the law. For employers that have made adjustments to comply, this relief comes too late to delay those changes, but it at least confirms that small employers have no ACA risk for reimbursements up to this point.
To confirm, this guidance does NOT change the analysis for large employers or for small employers past the transition period (6/30/15). It remains true that, in order to avoid significant financial risk under the ACA, employers cannot pay or reimburse individual health insurance premiums for active employees. This applies whether any payments or reimbursements are made on a taxable or non-taxable basis.
Key transition rules included in Notice 2015-17:
- Transition relief for under-50 employers for January 1, 2014 through June 30, 2015. This means that small employers reimbursing individual premiums (by any method) are effectively exempt from any ACA excise tax penalties beginning 1/1/14 for failure to comply with ACA market reforms. This transition relief applies whether the reimbursement in 2014 or early 2015 has been tax-free or taxable. Beginning 7/1/15, the ACA tax penalty will apply to reimbursement of individual premiums by small employers. For 50+ employers (Applicable Large Employers subject to the employer mandate), there is no transition relief and the excise tax penalty could apply 1/1/14 forward.
- Transition relief for S-Corps reimbursing individual coverage for more-than-2% owners.
- Transition relief for employers reimbursing Medicare Part B or D premiums.
In addition, the Notice confirms:
- Now and later, employer “gross-up” arrangements do not violate the ACA rules, as long as the reimbursement is not conditioned on the purchase or amount of individual health coverage; and
- The “fewer than two” exception applies to premium reimbursement arrangements that benefit fewer than two active employees (such that the arrangements are exempt from the ACA rules). This exception extends to retiree coverage, which is not subject to the ACA rules on individual premium reimbursement and continues to be allowed, such as through a Retiree HRA.
This is a continuing, complex issue, and we will continue to monitor it closely as we assist employers.