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Small Business Employee Benefits and HR Blog

IRS Delays Penalties for Employer Payment Plans

On February 18th, 2015, the Internal Revenue Service released Notice 2015-17 outlining that penalties levied on small businesses with under 50 employees taking part in an Employer Payment Plan will be delayed until June 30, 2015. Notice 2015-17 is great news for small businesses nationwide struggling to offer affordable health benefits to their employees while remaining compliant with the Affordable Care Act.

Note: An HRP (ZaneHealth) is not an Employer Payment Plan. An HRP is a group health plan designed to reimburse employees for health insurance premiums while also complying with Market Reforms. Employers now have until July 1st, 2015 to adopt compliant solutions like ZaneHealth in order to avoid excise taxes.

What are Employer Payment Plans?IRS_Delays_Penalties_for_Employer_Payment_Plans

The IRS outlines an Employer Payment Plan as an arrangement where an employer reimburses an employee directly for individual health insurance policies or directly pays for employees’ premiums.

Why are Employer Payment Plans Subject to IRS Penalties?

In 2013, the IRS issued Notice 2013-54, which classified Employer Payment Plans as group health plans and therefore subject to Affordable Care Act Market Reforms. These reforms include the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Notice 2013-54 mandated that employers offering Employer Payment Plans fail to comply with these market reforms and may be subject to $100/day excise tax per applicable employee.

Subsequent Department of Labor rulings have outlined that regardless of whether these types of reimbursements occur on a pre-tax or post-tax basis, the arrangement constitutes a group health plan and must adhere to the ACA Market Reforms.

Does the IRS Notice 2015-17 Impact ZaneHealth Plans?

No. ZaneHealth plans are not Employer Payment Plans and because these plans meet the ACA Market Reforms, companies offering ZaneHealth (Health Reimbursement Plan) are not exposed to the excise tax.

Does the IRS Notice 2015-17 Impact ZaneHRA Plans?

Notice 2015-17 reiterates that Health Reimbursement Arrangements (HRAs) with fewer than two employees do not qualify as a group health plan and, therefore, are not subject to the Affordable Care Act Market Reforms. Small businesses can continue to offer a single participant stand-alone HRA without being subject to the excise tax.

Previous guidance put a stop to small business use of certain stand-alone HRAs when two or more employees participated in the plan (severely limiting a crucial affordable health benefits option available to small businesses).

Are Any Other Arrangements Mentioned?

Yes, Notice 2015-17 specially addresses the use of employer arrangements to fund Medicare premium payments or to provide a TRICARE-related Health Reimbursement Arrangement.  If such arrangements cover two or more active employees, then the arrangement is a group health plan and is subject to the ACA market reforms and to the associated penalties after the June 30th, 2015 extension.

What Does the Recent Announcement Mean for Business Owners? 

Specifically, the IRS will continue to allow more than two percent shareholders in an S-corporation to deduct their premiums on Page 1 of Form 1040 pursuant to Section 162(l). Tax penalties also will be delayed on more than two percent S-Corporation shareholders until further guidance is issued.

Where Does That Leave a Small Business Subject to These IRS Penalties?

While employers can still choose to increase employees’ compensation as long as the compensation does not coincide with the purchase of an individual health insurance policy, employers should avoid reimbursing employees directly for healthcare costs--either on a pre-tax or post-tax basis--as this arrangement remains subject to the ACA Market Reforms.

Employers interested in reimbursing employees for health insurance premiums must ensure they establish a formal reimbursement plan in compliance with the Market Reforms (such as ZaneHealth).  

With the delay of the IRS tax penalties, small businesses now have the time needed to consider health benefits options that adhere to the Market Reforms. This can include utilizing the SHOP (Small Business Health Options Program) federal market place or establishing a compliant self-insured medical reimbursement plan such as an HRP.

What’s Next?

While the recent Notice is a temporary solution, this is not enough and many -- including Zane Benefits -- are calling on Congress to find a permanent solution for HRAs. Small businesses may see further relief with the reintroduction of the Small Business Healthcare Relief Act, previously introduced in 2014 by Reps. Mike Thompson (D-CA) and Charles Boustany (R-LA).

The legislation aims to fix existing guidance that limits the use of stand-alone Health Reimbursement Arrangements (HRAs) for small businesses. Without access to these options, small businesses are placed at a disadvantage without the affordable health benefits needed to recruit and retain quality employees.   

Conclusion

Health benefits are a big part of small business success. As businesses struggle to find affordable healthcare options, the recent announcement from the IRS Notice comes as great news. With the delay of the IRS tax penalties, small businesses nationwide now have the extra time needed to consider health benefits options while remaining compliant with the Affordable Care Act.

What questions do you have about the IRS delayed penalties for Employer Payment Plans? Leave a comment below.

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