IRS Notice 2015-17 Provides Some Limited ACA Penalty Relief to Small Employers

For additional reading on this topic, see The Irony of Yesterday's Limited ACA Penalty Relief.


IRS has just issued Notice 2015-17, which provides some important guidance regarding the dreaded IRC § 4980D excise tax (for violating Affordable Care Act market reforms) and its applicability to small employers. It also provides some limited relief from the penalty in certain circumstances. Following is a summary of the guidance.

Small Employer Reimbursement of Health Care Premiums

While reaffirming that the reimbursement of individual health care premiums to employees constitutes an improper employer payment plan, the Notice provides transitional relief to small employers who are not “applicable large employers” (applicable large employers are generally those with 50 or more full-time employees).

Small employers who continued to offer an employer payment plan will not have to file Form 8928 (the Form utilized to self-report violations and compute the penalty tax) and will not be liable for the excise tax through June 30, 2015. Beginning July 1, 2015, however, these employers may be liable for the penalty if they do not reform their illegal plan.

The Notice states this transitional relief applies both to the reimbursement of Medicare Part B or Part D premiums (more on this below) and to the reimbursements of individual health policy premiums.

This Notice does not provide transitional relief to small employers who offered stand-alone HRA’s or other medical expense reimbursement plans to their employees.

Two-Percent Shareholders

While we still have no answer to the big question of whether the reimbursement of S-Corporation two-percent shareholder-employees’ individual premiums will be subject to market reforms, this Notice offers relief: Unless and until any further guidance is issued and certainly through the end of 2015, no excise tax will be asserted for any failure to satisfy the market reforms by a two-percent shareholder-employee healthcare arrangement.

Therefore, at least through 2015, Form 8928 will not need to be filed solely because the employer offered a two-percent shareholder-employee healthcare reimbursement arrangement. This does not apply, however, to reimbursements of individual health coverage premiums with respect to employees of S Corporations who are not two-percent shareholders. These arrangements would, however, be eligible for the transitional relief through June 30, 2015, as long as the S Corporation is not an applicable large employer.

The Notice also provides that tax preparers may continue to rely on Notice 2008-1 for the tax treatment of two-percent shareholder-employee healthcare arrangements unless and until additional guidance provides otherwise.

Fewer than Two Participants Who Are Current Employees – S Corporation

The Notice provides that if an S-Corporation maintains a health reimbursement arrangement under which a two-percent shareholder-employee and a non-two-percent shareholder employee are both covered, this will constitute a group health plan for the current employee and will not fall under the "fewer than two participants who are current employees" exception. This is true even if the corporation attempts to reimburse the classes of employees through separate plans. The different arrangements are considered one plan for purposes of the “fewer than two participants…” exception. In other words, the reimbursement of the non-shareholder employee will be illegal.

Fewer than Two Participants Who Are Current Employees – Family Coverage

This Notice clarifies that if an employee is covered under a reimbursement arrangement with his spouse or dependent (who are also employees), this arrangement will be considered to cover only one employee. As such, a small family business with no other employees may continue to reimburse for a family plan and fall under the “fewer than two participants who are current employees” exception to the market reforms.

Integration of Medicare Premiums

The Notice states that the reimbursement of Medicare Part B or Part D premiums does constitute an employer payment plan violating market reforms and that the reimbursement may not be integrated with Medicare to satisfy the reforms. The Notice does provide, however, a method for integrating this reimbursement with an employer group plan (so as to make it permissible). That method is as follows:

(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.

Increase in Employee Compensation to Assist with Payment of Individual Market Coverage

The Notice reaffirms that increasing an employee’s compensation and not conditioning that payment on the purchase of health coverage would not constitute an improper employer payment plan.

Treating an Employer Payment Plan as Taxable Compensation

Finally, the Notice reiterates what was made clear in the November Department of Labor FAQ: Treating premiums as taxable compensation does not “solve” the market reforms problem. Also, Rev. Rul. 61-146 continues to apply to exclude substantiated premiums from an employee’s gross income under IRC § 106. In other words, if an employer has to pay the excise tax for an improper employer payment plan, the employee will still be able to exclude the improper payments from income.

The Notice states that further guidance with respect to HRAs and other aspects of employer payment plans will be provided in the near future. Stay tuned!


CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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