On February 18, 2015, the Internal Revenue Service (IRS) issued important new guidance providing transitional relief from enforcement of certain Patient Protection and Affordable Care Act (ACA) excise taxes on employer healthcare reimbursement and payment arrangements commonly used by small employers.  Previously, the IRS generally stated that arrangements to reimburse employees for their non-employer-sponsored health insurance premiums (i.e., employer payment plans) and other health expenses (i.e., health reimbursement arrangements or HRAs) may violate the new ACA market reforms (namely, the prohibition against annual limitations) and, thus, trigger the  $100 per day excise taxes under Section  4980D of the Internal Revenue Code (Code).  See, e.g., Notice 2013-54, 2013-40 I.R.B. 287 (Sept. 30, 2014).  In its latest guidance, the IRS provides limited transitional relief from those excise taxes for these arrangements offered by small employers, and it clarified some of the uncertainties raised by prior guidance.  While this is welcomed news for small employers, the new guidance does not provide permanent relief to all employers who sponsor employer payment plans and non-integrated HRAs. As we discuss below, we expect new regulations under Section 4980D of the Code in the near future.  In Notice 2015-17, the IRS:

• Provides that employers who are not applicable large employers (ALEs) for 2014 and 2015 will not be assessed Code Section 4980D excise taxes through June 30, 2015, for failure to satisfy the ACA’s market reforms that would otherwise arise from having offered an employer payment plan used to pay or reimburse employees for individual health policy premiums or Medicare Part B or Part D premiums;
• Provides that until new guidance is issued (but at least through the end of 2015) employers will not be assessed Code Section 4980D excise taxes for failure to satisfy the ACA’s market reforms that would otherwise arise from having offered an employer healthcare arrangements that is an S-Corporation healthcare arrangement for 2% shareholder–employees;
• Reiterates that employer payment plans and HRAs covering fewer than two active employees are not subject to the ACA market reforms;
• Confirms that arrangements reimbursing employees for Medicare Part B or Part D premiums constitute employer payment plans under Revenue Ruling 1961-146 and that such arrangements may be integrated with group health plans under certain circumstances to satisfy the ACA market reforms (thus avoiding Code Section 4980D excise taxes);
• Confirms that arrangements reimbursing employees covered by TRICARE for some or all of their medical expenses (i.e., TRICARE-related health reimbursement arrangements) are HRAs that can be integrated with group health plans under certain circumstances to satisfy the ACA market reforms (thus avoiding Code Section 4980D excise taxes);
• Confirms that increasing employee compensation for the purpose of allowing an employee to purchase health coverage is not an employer payment plan subject to the ACA’s market reforms, so long as the compensation is not conditioned upon the purchase of such coverage, even if the employer provides employees with information about purchasing insurance on an insurance exchange; and
• Confirms that impermissible employer payment plans arise even where employers offer reimbursements or payments for non-employer-sponsored health insurance premiums on an after-tax basis.

It is important to note that the transitional relief in Notice 2015-17 for employers who have employer payment plans is only available to employers who are not ALEs under the statutory definition (i.e., they have an average of less than 50 full-time and full-time equivalent (FTE) employees).  In prior guidance, the IRS provided that employers with less than 100 FTEs would not be considered ALEs in 2014 or 2015 for purposes of the employer “pay or play” mandate and excise taxes under Code Section 4980H.  Notice 2015-17, however, concerns excise taxes under Code Section 4980D for failure to comply with the ACA’s market reforms, and the IRS has made temporary relief from those excise taxes for employer payment plans available only to small employers with less than 50 full-time and FTE employees.

Though Notice 2015-17 provides welcomed relief from Code Section 4980D excise taxes and additional guidance on the treatment of small-employers’ reimbursement arrangements, the IRS anticipates releasing additional guidance in the near future.  We expect to hear more about the application of ACA health insurance market reform regulations on 2% shareholder–employee healthcare arrangements, and because Notice 2015-17 itself has some conflicting and ambiguous language, we expect that it is not the last word on the ACA’s treatment of employer payment plans and HRAs.  So, stay tuned!

Any opinions expressed and any legal positions asserted in the article are those of the author(s) and do not necessarily reflect the opinions or positions of Miles & Stockbridge P.C. or its other lawyers. This article is for general information purposes and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel. If you would like additional information on the subject matter of this article, please feel free to contact any of the lawyers listed above. If you communicate with us, whether through email or other means, your communication does not establish an attorney-client relationship with either Miles & Stockbridge P.C. or any of the firm's lawyers. At Miles & Stockbridge P.C., an attorney-client relationship can be formed only by personal contact with an individual lawyer, not by email, and requires our agreement to act as your legal counsel together with your execution of a written engagement agreement with Miles & Stockbridge P.C.