Affordable Care Act: Small Employers Can Now Breathe a Sigh of (Penalty) Relief

It’s a rare occasion when good news comes from the IRS. Nevertheless, the Service has issued a notice (Notice 2015-17) to provide temporary relief for small employers (i.e., employers that averaged less than 50 employees in the prior tax year) who reimburse or pay premiums for the individual health care policies of their employees.

Previously, the IRS stated that such arrangements did not meet certain market reform provisions of the Affordable Care Act. (Under new ACA rules, any reimbursement plan that covers more than one employee is considered a group health care plan.) Therefore, small employers who provided those benefits could have been subject to a substantial excise tax (i.e., a $36,500 per-employee penalty).

But since the market is still transitioning and the transition of eligible employers to the Small Business Health Options Program (SHOP) Marketplace will take time, the IRS has decided to waive the penalty for 2014 and for January to June 2015. Additionally, small employers that pay or reimburse employees for Medicare Part B or D premiums or for TRICARE-related expenses will not be subject to penalties regarding these benefits (provided certain conditions are met).

However, relief is only temporary; the penalty is set to go into effect on July 1, 2015. Here are two things small employers should note to comply with ACA rules regarding the reimbursement of individual health care plans going forward.

What small employers should do:
By increasing an employee’s compensation without conditioning the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance), employers can keep the arrangement from being considered an employer payment plan. In addition, because this arrangement generally will not constitute a group health plan, it is not subject to market reform provisions. The IRS also notes that simply providing employees with information about the Health Insurance Marketplace or the premium tax credit does not qualify as an endorsement of a particular policy, form, or issuer of health insurance.

What small employers should not do:
If employers dedicate reimbursements or payments to providing medical care, such as dedicating cash reimbursements to the purchase of an individual market policy, this arrangement is considered a group health plan—and subject to applicable market reform provisions, regardless of whether the money is presented as pre- or post-tax to the employee. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and will be subject to substantial excise tax.

So while small employers can breathe a sigh of relief for now, they should be fully aware of how ACA rules could affect the way they choose to reimburse their employees’ individual health care plans in the near future. If you have questions or would like additional information on this topic, please don’t hesitate to give me a call.

Chris Powers, CPA, is an AEM Business Partner who specializes in helping businesses and nonprofits grow. You can reach Chris at 507.304.6828 or at christine.powers@aemcpas.com.