A Firm Advocate for You

News & Events

Small Employers May be Subject to Excise Tax for Offering Employees Premium Payment Plans

On February 18, 2015, the Internal Revenue Service (“IRS”) issued Notice 2015-17 which provides further guidance on the application of the Affordable Care Act (“ACA”) to employer premium payment plans. Notice 2015-17 further clarifies previously issued guidance, including the IRS FAQ Guidance issued on November 6, 2014 and IRS Notice 2013-54.

Prior IRS guidance provides that employer premium payment plans, including premium reimbursement arrangements, are considered Group Health Plans under the ACA and such arrangements do not comply with the market reforms of the ACA. Specifically, employer premium payment plans violate the prohibition on annual dollar limits for health insurance plans and the requirement that group health plans provide certain preventative services at no cost. For example, under the ACA and IRS guidance, an employer is not permitted to offer cash reimbursements to employees for the purchase of health insurance coverage on the individual market. Similarly, an employer is not permitted to offer a cash-in-lieu-of-coverage option to employees with high claims risks. The prohibition on employer premium payment plans applies regardless of whether the payments are made to employees on a pre- or post-tax basis.  If an employer offers a premium payment plan to reimburse employees for premiums purchased on the individual market, the employer will be subjected to an excise tax of $100 per day per employee.

Notice 2015-17 further clarifies the IRS’s position on employer premium payment plans in several respects. First, it makes clear that the prohibition on employer premium payment plans applies to all employers, even small employers who generally are not subject to the Employer Mandate provisions of the ACA (those with fewer than 50 full-time or full-time equivalent employees). This means that although small employers are not required to offer health insurance to full-time employees, they may not reimburse employees for insurance premiums purchased on the individual market without being subject to the excise tax.

Second, Notice 2015-17 provides some transitional relief for small employers. While applicable large employers (those employers with 50 or more full-time or full-time equivalent employees) are already subject to the penalties for providing employees with premium reimbursements, small employers have until June 30, 2015 to phase out any premium payment plans before being subject to the excise tax.

Third, Notice 2015-17 provides that an employer may provide an increase in compensation to its employees to assist its employees with payments for individual market coverage as long as the increase in compensation is not conditioned on the purchase of health insurance coverage. This means that an employer is permitted to give its employees a raise or bonus to help offset the cost of purchasing coverage as long as the employer does not require the employees to use the funds to purchase health insurance coverage.

What Does This Mean For You? It is important for employers to ascertain whether they are an applicable large employer or a small employer under the ACA. This determination is critical in effectively managing ACA compliance in general. Small employers should review any plan or policy currently in place which provides reimbursement to employees for health insurance premiums to determine if the plan or policy constitutes a group health plan under the ACA. If a small employer determines that its plan or policy is a group health plan, the employer should determine how to discontinue the plan or policy to avoid the steep penalties that could be imposed beginning after June 30, 2015.

If you have any questions about ACA compliance or any other employment or labor law issue, please contact Grace C. Nguyen Bond at (717) 509-7226 or gcnb@bbt-law.com or S. Whitney Rahman at (717) 509-7237 or swr@bbt-law.com.

This update is for informational purposes only and should not be construed as legal advice or as creating an attorney-client relationship where one does not already exist.