In the past, companies could give employees an allotment of money sufficient to reimburse them for their costs of buying coverage or a portion of it.
They found this to be less expensive and have less administrative costs than having a group insurance plan to manage. As long as the employees could show proof that these funds were being used for this purpose, the funds were excludable from taxable income for the employees. Alternatively, companies could pay the premiums directly.
This has, however, changed.
In November 2014, the Department of Labor (DOL) declared that reimbursing employees for insurance costs was equivalent to a health plan and is subject to the Affordable Care Act (ACA). Under the ACA, a group health plan that reimburses employees for the employees’ substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. Since then, these reimbursement arrangements have been ruled to be noncompliant with the ACA. Thus, reimbursement plans may be subject to a very severe penalty.
$36,500 PER EMPLOYEE PENALTY
After the DOL ruling and a decree from the IRS, companies with such reimbursement arrangements in place would be subject to a $36,500 penalty per employee ($100 per day per employee).
Back in February, the IRS issued Notice 2015-17, which provides small employers limited relief from the stiff $100 per day, per employee penalties under IRC §4980D for health insurance reimbursement plans that had been addressed in Notice 2013-54. In particular, that notice provided:
Transitional relief for employers that do not meet the definition of large employers (i.e., employers with 50 or more employees). This relief is granted for all of 2014 and for January 1 through June 30, 2015.
This penalty also applies to small employers with 50 or fewer equivalent full-time employees (who are under no legal obligation to provide health insurance plans for its employees, but makes reimbursements simply to help the employees).
Furthermore, the Notice reconciles the IRS with a position the DOL had taken previously – reimbursement plans were declared as taxable payments to employees and doesn’t prevent these from being deemed as health insurance plans. The only remedy was for companies to “gross up” these contributions (i.e. add to them enough money to also cover the tax liability employees would incur as a result of receiving the payments) as well as make it clear to employees that they could do whatever they wished with the funds they received.
Well, June 30, 2015 has come and gone and so has the small employer relief. Therefore, employers who still reimburse employees for their medical expenses are in danger of being subject to the penalty. Compared to the annual $2,000 penalty that large employers face for not providing insurance to their full-time employees, the penalties on small employers are substantial.
EMPLOYEES WITH S CORP STOCK
IRS Notice 2015-17 also provided relief to employees who own at least 2% of their employers’ stock (if the company is a S-corporation):
Relief for S corporations that pay for or reimburse premiums for individual health insurance coverage for 2% shareholders, as previously addressed in Notice 2008-1. The relief period is indefinite, and the IRS states that taxpayers may continue to rely on Notice 2008-1 “unless and until additional guidance” is provided.
Until additional guidance is issued by the IRS, these companies are off the hook as well as the employees who will continue to be allowed to deduct the income as self-employed health insurance premiums.
If you have any questions regarding how this reprieve or how the changes to the small business health care tax credit may affect your company, please feel free to contact us using our contact form or call us at (209) 526-3091.