If you employ under 50 full-time employees and reimburse those employees for the cost of their individual health insurance, the IRS just cut you a (temporary) break. Just this week, the IRS issued guidance that wipes away potential penalties for 2014 and for the first six months of 2015.
As a bit of background, the IRS considers premium reimbursement arrangements to be in violation of the Affordable Care Act (“ACA”). Because the IRS classifies premium reimbursement arrangements as a type of group health plan, the arrangements violate several ACA mandates such as coverage limit prohibitions and preventative care requirements. Offering a premium reimbursement arrangement would trigger the employer excise tax of $100 per day for each affected employee.
The new IRS guidance (Notice 2015-17), confirms the IRS belief that these arrangements violate the ACA. However, the IRS recognizes that these arrangements are historically common among small employers. The IRS also admits that implementation of the ACA alternative for small employers (the “SHOP Marketplaces”) has been slow and ineffective.
The Notice provides that a small employer may reimburse employee premiums for individual health insurance through June 30, 2015, without incurring a penalty. In addition, no penalty will be assessed for reimbursement arrangements that operated during 2014.
This relief only applies to small employers. An employer qualifies as a small employer for this purpose if it employed less than 50 full-time (or full-time equivalent) employees during any consecutive 6-month period in the prior year. Thus, for 2014, the determination is based on the employer’s 2013 workforce. For 2015, the determination is based on the employer’s 2014 workforce.
Small employers can breathe a sigh of relief – though the relief is short-lived. The Notice provides much needed guidance on winding down an impermissible premium reimbursement arrangement. Effective July 1, 2015, small employers will want an alternative in place. One such alternative could be adopting a plan through the SHOP Marketplace. An employer can adopt a plan through the SHOP Marketplace, and employees can enroll, at any time during the year. There is no need to wait for annual or special enrollment periods.
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