New IRS Clarification on Employer Healthcare Reimbursement Arrangements

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On February 18, 2015, the Internal Revenue Service issued Notice 2015-17, which reiterates the conclusion in previous guidance addressing employer payment plans – that they are not in compliance with the Affordable Care Act (ACA). This article will discuss the additional guidance provided by Notice 2015-17, and it will also serve as an update to the article that Stockman Kast Ryan & Co. published on December 15, 2014 linked here:

HEALTH_INSURANCE-180Transition Relief for Small Employer Reimbursement Plans

Notice 2015-17 states that employer payment plans, (plans that pay directly for or reimburse employees in part or full for health insurance) are considered group health plans that are not in compliance with the Affordable Care Act. However, the Notice does provide transition relief to small employers – those who are not Applicable Large Employers, meaning that they have less than 50 full-time or full-time equivalent employees. Small employers have until June 30, 2015 to transition their plan to one in compliance with the Affordable Care Act or be subject to excise tax under Internal Revenue Code §4980D. The excise tax is equal to $100 per day, per employee, or $36,500 per participant, per year.  

The transition relief applies to:

1.Employer payment plans, as described in Notice 2013-54 (;

2.S Corporation healthcare arrangements for 2-percent shareholder-employees;

3.Medicare premium reimbursement arrangements;

4.TRICARE-related health reimbursement arrangements (HRAs).

S Corporation Guidance for 2% Shareholder-employees

Notice 2015-17 provides that the IRS is still contemplating publication of additional guidance on the application of market reforms to a 2-percent shareholder-employee healthcare arrangement. The good news for taxpayers is that until this guidance is issued, and in any event through the end of 2015, these arrangements will not be subject to the excise tax under Internal Revenue Code §4980D. In addition, S corporations with a 2-percent shareholder-employee healthcare arrangement will not be required to file Form 8928. Keep in mind that this relief does not apply to S corporation employees who are not 2-percent shareholders.

As discussed in the December article, the market reforms do not apply to a group health plan with less than two participants. For this reason, a plan covering only a single S corporation employee is not subject to the market reforms or the excise tax.

Medicare Reimbursements

Arrangements that reimburse employees for Medicare Part B or Part D premiums are considered employer payment plans under IRS Notice 2013-54. Notice 2015-17 discusses that when an employer reimburses the cost of Medicare premiums and integrates this with another group health plan offered by the employer, then this is permissible under the market reforms.

 However, this is permissible only if:

1.The employer offers a group health plan (other than the Medicare reimbursement arrangement) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;

2.The employee participating in the Medicare reimbursement arrangement is actually enrolled in Medicare Parts A and B;

3.The Medicare reimbursement arrangement is available only to employees who are enrolled in Medicare Part A and Part B or Part D;

4.The Medicare reimbursement arrangement is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medicare premiums.

Employee Reimbursement

Notice 2015-17 confirms the argument that an employer may increase an employee’s taxable compensation, not conditioned on the purchase of health insurance, without creating an employer payment plan.  Because this type of arrangement will not be considered a group health plan, it is not subject to the market reform provisions.

Unfortunately, the IRS has clarified that after-tax employer payment plans are, in fact, subject to excise tax under Code §4980D. An arrangement where an employer pays for or reimburses an employee for the cost of health insurance is subject to the market reform provisions of the Affordable Care Act without regard to whether the employer treats the money as pre-tax or post-tax to the employee.


The market reform provisions of the Affordable Care Act are continuously updating and taking shape as more guidance is received on the application of these rules from the IRS. Notice 2015-17 contains some important clarification on the employer reimbursement arrangements as well as transition relief through June 30, 2015 for some small employer plans. We will continue to update you as new information and guidance becomes available.


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