June 30th Deadline for Employers to Stop Paying for Employees’ Non-Group Health Insurance Policies

At the beginning of 2015, many small employers became aware that the Affordable Care Act (ACA) required changes to the long-standing practice of providing financial assistance to employees purchasing personal health insurance policies.  These changes apply to employers not subject to the mandate to offer health insurance because they have less than 50 employees.  That is the confusing part.  The employers aren’t subject to the mandate but they still must comply with other provisions of the ACA, including how financial assistance with premium costs are to be provided to employees.

Small employers affected by the change did not offer group policies, but rather reimbursed or directly paid part or all of the premiums of policies selected by their employees.  The ACA rendered such practice impermissible after 2013.  The IRS terms these arrangements as “employer payment plans” which, while still permitted for income tax purposes, are not permitted by the ACA.  At the beginning of 2015, such employers realized that they were exposed to a year’s worth of devastating penalties of $100 per day per employee or $36,500 per employee!

On February 18, 2015, the IRS issued Notice 2015-17 which granted a transitional period of time through June 30, 2015 to permit impacted employers to cease such arrangements and avoid penalty.  If the practice continues after June 30^th, absent an extension of time by the IRS, the $100 per day per employee penalty resumes.

Impacted employers can take one of several steps to provide premium assistance to employees and avoid the penalty, but they must cease reimbursing and paying premiums for individual policies by June 30^th.

1.     Offer ACA-compliant group health insurance and pay a portion or all of the premiums.

2.     Enroll in the Small Business Health Options Program (SHOP) Marketplace (known as Avenue H in Utah) which allows employees to pick their own policies offered through the SHOP.

3.     Give employees a raise in compensation with no conditions that the money actually be spent on health insurance premiums.  This, of course, is a very tax-inefficient method because unlike methods 1 and 2, such compensation is taxable.

Notice 2015-17 also indicates that the ACA changes do not apply if there are fewer than two participants who are current employees on the first day of the plan year.

Application to > 2% S Corporation Shareholder Employees

Notice 2015-17 extends relief from the $100 per day penalty for reimbursing or paying for individual policy premiums of S corporation employees (who own more that 2% of the stock) through December 31, 2015.  The Notice indicates that further IRS guidance will be issued.  There are conflicting tax rules with respect to S corporation shareholder employees’ health insurance premiums and the IRS evidently needs more time to resolve the conflict.