Over the past several months, we’ve written about the $100 per-day per-employee penalty for employers who reimburse or directly pay for their employees’ individual health insurance policies. This penalty was to be effective for 2014 and later years. The IRS recently issued Notice 2015-17 that provides employers a little more time before this penalty becomes effective.
For years, many employers have provided health coverage to their employees by either directly paying for or reimbursing employees for their individual health coverage. These payments were deductible to the employer and tax-free to the employee. Under the Affordable Care Act market reforms, if these plans covered more than one employee, the plan would be considered a group health plan. As such, the plan must not have annual or lifetime limits on coverage. These plans were deemed to have limits equal to the premium the employer paid on behalf of the employee. Because of this, the employer would be subject to a $100 per-day per-employee penalty (i.e., $36,500 per employee per year).
The IRS and the Department of Labor recently realized (eventually they catch on) that some employers that have offered these plans may need additional time to obtain group health coverage or adopt a suitable alternative.
The latest guidance provides that the penalty will not be applied for 2014 for employers that are not Applicable Large Employers for 2014. An Applicable Large Employer is an employer with 50 or more full time employees (including full time equivalents) during the prior year. The penalty also will not apply for January 1, 2015 to June 30, 2015 for employers that are not ALEs for 2015. After June 30, 2015, all non-compliant employers will be subject to the penalty.
This relief applies only for payment of or reimbursement of health insurance. The relief does not apply to health reimbursement accounts or other arrangements that reimburse employees for medical expenses other than insurance premiums.
Guidance for S Corporations
The IRS and the Department of Labor are contemplating additional guidance on how these rules apply to S corporations. Until such guidance is issued, and at least through the end of 2015, the penalty will not be asserted against an S corporation for a plan that provides individual health coverage to S corporation shareholder-employees. Basically, the penalty will not apply to S corporation shareholders through the end of 2015, but it may apply to other employees after June 30, 2015. If a plan covers 1 shareholder and 1 employee, the plan covers two employees and is a group health plan and the penalty would apply to the 1 employee (after June 30, 2015).
Quick (but expensive) Fix
One way around this penalty is for an employer to increase an employee’s taxable compensation, but not to condition the increase on the purchase of health insurance. If the increase is conditioned on the employee using the increased compensation to purchase health insurance coverage, the penalty will apply (after June 30, 2015.) Basically, the employee must pay income and FICA tax on the income, and the employer will pay payroll taxes on the payment.
If you have questions on how this relief applies to you, give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.