Small Employers Must Cease Health Insurance Premium Reimbursement Arrangements by June 30, 2015

Volume 14, Issue 11
June 19, 2015

According to the Internal Revenue Service's Notice 2015-17, small employers - as defined by the Affordable Care Act (ACA) as those employers with less than 50 full-time or full-time equivalent employees on average - will need to make alternative arrangements by June 30, 2015 if they currently "reimburse[] an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pay[] a premium for an individual health insurance policy covering the employee," regardless of whether the payment is pre-tax or post-tax.

Previously, in Notice 2013-54, the IRS labeled this practice an "employer payment plan" and declared it subject to the same guidelines as a group insurance plan, including preventive care and annual limit requirements. This is also applicable to programs that reimburse Medicare premiums without utilizing an additional group health plan. Employers continuing to offer reimbursement or direct payment for individual plans are subject to an aggressive excise tax of $100 per day, per employee, which amounts to $36,500 per year, per employee. However, by way of Notice 2015-17, the IRS recognizes that small employers may need additional time to obtain other coverage and granted transitional relief until June 30, 2015. Therefore, now is the time for small employers to consider their options.

While small employers are not required to provide insurance to employees under the ACA, transitioning from premium reimbursements to no coverage will probably have a negative effect on the workforce. Additionally, if the small employer has fewer than 25 full-time equivalent employees that make $50,000 or less annually on average and pays at least 50% of the employees' premiums, the small employer can qualify for a tax credit to assist with insurance purchased through the Small Business Health Options Program ("SHOP").

However, if a small employer does not want to consider SHOP or an independently-acquired group health plan, in the alternative, it can convert the funds previously used for reimbursement into a general unconditional raise. As long as the raise is not conditioned on a particular use - i.e., towards insurance - the small employer will not be subject to the excise tax. This is true even if the employer indicates that the raise can be used towards insurance, provided the employer also clearly communicates that the employee is not required to do so.

While small employers still have some time to weigh their options, applicable large employers were not granted a transition period. Therefore, applicable large employers need to stop providing reimbursement or directly paying individual premiums immediately or risk steep penalties.

Regardless of the size of your company, if you have any questions about this legal development, please do not hesitate to call the KZA attorney with whom you regularly work or call our office at (702) 259-8640.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.