New guidance issued on February 18th provides limited relief to certain small business taxpayers and may be beneficial for many Wipfli clients. This guidance is important in that it provides clarity for employers on certain issues that otherwise exposed the employer to $100 per day per employee excise taxes under Code Section 4980D for noncompliance with Affordable Care Act (ACA) mandates.
In September of 2013, the IRS issued guidance in Notice 2013-54 that made it difficult for small employers to provide a means to help their employees pay for health insurance or uninsured health expenses. If employers do not comply with the guidance, which was effective starting in 2014, they are subject to the Code Section 4980D excise tax for failure to comply with ACA mandates. The penalty is to be paid by filing new IRS Form 8928.
The new guidance does not change previous guidance, but the IRS, DOL, and HHS have realized that some small employers may need additional time to obtain group health coverage or adopt an alternative benefit for employees. Notice 2015-17 reiterates some previous guidance and provides a transition rule for small employers, as well as clarifies guidance for more-than-2% S corporation shareholders, Medicare premium and TRICARE reimbursement arrangements, and alternative compensation arrangements.
Transition Relief for Small Employers
Small employers for purposes of the transition rule are employers that are not considered Applicable Large Employers (ALEs) under the Employer Shared Responsibility rules, meaning a small employer that employed an average of less than 50 full-time equivalent employees in the prior calendar year. The guidance provides that an employer that is not an ALE will not be charged the excise tax under Code Section 4980D for reimbursing employees for individual health insurance policies or for Medicare Part B or Part D premiums for all of 2014 and for January 1 through June 30 of 2015. This does not change the taxation to the employee, but just provides an exemption to the excise tax. Further, the transition relief does not extend to stand-alone Health Reimbursement Arrangements or other arrangements to reimburse employees for medical expenses other than insurance premiums.
S Corporation Healthcare Arrangements for More-than-2% Shareholders
IRS is contemplating further guidance in this area, but until then and at least through the end of 2015, the excise tax under Code Section 4980D will not apply to a healthcare arrangement for a more-than-2% S corporation shareholder and Form 8928 will not need to be filed. In addition, until further guidance says otherwise, taxpayers may continue to rely on guidance in IRS Notice 2008-1 with regard to the tax treatment for S corporation shareholders for all federal income and employment tax purposes. Thus, a more-than-2% S corporation shareholder’s health insurance is added to taxable income on their Form W-2 and is not Social Security or Medicare taxable wages. Also, the shareholder can deduct the cost of the self-employed health insurance in computing adjusted gross income on their personal tax return.
A health arrangement covering a single employee (whether or not that employee is a more-than-2% S corporation shareholder) is not subject to the ACA market reforms. To use the one person plan exception, the S corporation cannot have any other health arrangement covering other employees, whether it be group or individual coverage. A one-employee arrangement would not fail to satisfy the ACA, and the tax treatment of IRS Notice 2008-1 would apply, regardless that the insurance was an individual health insurance policy, which can be either single or family coverage.
Medicare Premium Reimbursement Arrangement or TRICARE-Related HRA
IRS has provided guidance that allows employers to integrate Medicare premium reimbursement arrangements with an employer’s group health plan to permit those types of arrangements to continue. Note that these arrangements may be subject to other laws, such as Medicare secondary payer provisions. Similar provisions apply to employer reimbursement arrangements for medical expenses of employees covered by TRICARE.
Compensation Increases to Assist with Payment of Individual Coverage
An employer is allowed to increase an employee’s compensation to assist them with purchasing health coverage, as long as the compensation increase is not conditioned on the purchase of health insurance.
Revenue Ruling 61-146 Taxable Income Exemption and Market Reform Applicability
IRS has received requests for guidance from taxpayers and stakeholders for all of these issues, and also for one issue in particular that has created much confusion. Rev. Rul. 61-146 provides that employer reimbursement for an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance (i.e. individual health insurance premiums) can be excluded from an employee’s gross income under Code Section 106. This exclusion applies even if the employer pays the premiums directly to an insurance company. The guidance provides that this tax rule is still in existence; however, the taxation rule in Rev. Rul. 61-146 does not address the market reform rules of the ACA which still apply to these arrangements because the arrangement is a group health plan under IRS Notice 2013-54. So these arrangements are, in effect, prohibited, regardless of whether the employer treats them as pre-tax or post-tax benefits to the employee. So, in effect, IRS is saying an employer cannot rely on other provisions in the tax law and related guidance to avoid the ACA market reform requirements.