According to recently issued guidance from the Internal Revenue Service (“IRS”), enforcement of the Affordable Care Act’s (“ACA”) market reforms will be delayed for certain small employers that pay for individual health insurance policies for their employees. Notice 2015-17 reiterates that these arrangements constitute group health plans that fail to satisfy applicable ACA market reforms but recognizes that some small employers utilizing these arrangements may need additional time to transition to compliant group health coverage or find a suitable alternative. Accordingly, the IRS has extended limited relief to these employers in the circumstances specified in the Notice. Similar relief has been extended to S corporations that pay for individual health insurance policies for their 2% owners. Moreover, the Notice prescribes the conditions under which employers that pay for Medicare and TRICARE premiums may satisfy these ACA market reform requirements. The details of this relief and the other issues covered by Notice 2015-17 are set forth below.

An “employer payment plan” is an arrangement in which an employer pays or reimburses an employee for some or all of the premiums for an individual health insurance policy. In its previously-issued guidance, the IRS addressed how the ACA’s market reform requirements apply to employer payment plans. Specifically, in Notice 2013-54, the IRS explained that employer payment plans are group health plans that fail to satisfy (1) the ACA’s prohibition against annual limits on the dollar amount of essential health benefits covered under the plan and (2) the ACA’s requirement that non-grandfathered plans cover certain preventative services without imposing any cost sharing.

Employer payment plans fail to satisfy these market reform requirements because they:

• Are considered to impose an annual limit up to the cost of individual market coverage purchased through the arrangement;
• Do not provide preventative services without cost sharing in all instances; and
• Cannot be integrated with any individual health insurance purchased under the arrangement in order to satisfy the above requirements.

In Notice 2015-17, the IRS expands upon the guidance it previously provided in Notice 2013-54 as follows:

1.  Small Employer Transition Relief through June 30, 2015 —Although employers that offer employer payment plans will generally be subject to excise tax penalties for the failure to satisfy ACA market reforms as of 2014, employers that are not Applicable Large Employers (“ALEs”) for 2014 and 2015 will not become subject to those penalties (and therefore will not be required to file IRS Form 8928 to report and pay those penalties) until after June 30, 2015.

An employer is an ALE with respect to a calendar year if it employed at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year. To determine 2014 and 2015 ALE status for this purpose, however, any six consecutive month period from the prior year may be substituted for the entire preceding calendar year.

It is important to note that the transition relief provided by this Notice does not apply to stand-alone Health Reimbursement Arrangements (“HRAs”) or other arrangements that reimburse an employee for medical expenses other than insurance premiums. As a result, employers that offer stand alone HRAs that reimburse medical expenses other than health insurance premiums will be subject to penalties for 2014 and 2015 regardless of whether or not they qualify as an ALE.

2.  S Corporations-Transition Relief for 2% Shareholder-Employee Arrangements —Generally, S corporations that offer employer payment plans to 2% shareholder-employees must include amounts reimbursed to such employees in their gross income. However, the shareholder-employee is usually entitled to a deduction for such reimbursements. Notice 2015-17 explains that the IRS is considering issuing further guidance regarding how the market reforms apply to employer payment plans for 2% shareholder-employees in S corporations. Until such guidance is released, and in any event through December 31, 2015, S corporations that offer such arrangements to 2% shareholders will not become subject to penalties and will not be required to file a Form 8928. The IRS noted that this relief applies to the reimbursement of health insurance premiums for 2% shareholders only and does not extend to other employees who are not 2% shareholders.

Additionally, the ACA market reforms do not apply to group health plans that cover fewer than two participants who are current employees. Therefore, if a S corporation maintains a single-participant health insurance reimbursement arrangement, that arrangement will not be subject to the ACA market reforms (regardless of whether or not the participant is a 2% shareholder). However, an S corporation cannot avoid the ACA market reforms by maintaining multiple single-participant health insurance reimbursement arrangements for different employees – as the IRS will treat all such arrangements as a single plan that covers two or more participants.

3.  Medicare and TRICARE Reimbursement Arrangements —Employer arrangements that reimburse active employees for premiums under Medicare Parts B or D or pay for expenses associated with coverage in TRICARE are employer payment plans that fail to comply with the ACA’s market reforms. However, Notice 2015-17 explains that these arrangements can be integrated with other group health plans.

Medicare reimbursement arrangements will be considered to be “integrated” with another group health plan if:

• The employer offers a group health plan other than the employer payment plan that does not consist solely of excepted benefits and offers minimum value coverage;
• The employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B;
• The employer payment plan is available only to employees who are enrolled in Medicare Part A and B, or Part D; and
• The employer payment plan is limited to reimbursement of Medicare Part B or D premiums and excepted benefits, including Medigap premiums.

HRAs that reimburse employees for costs associated with coverage under TRICARE will be considered to be “integrated” with another group health plan if:

• The employer offers group health plan coverage other than the HRA that does not consist solely of excepted benefits and provides minimum value coverage;
• The employee participating in the HRA is enrolled in TRICARE;
• The HRA is available only to employees enrolled in TRICARE; and
• The HRA is limited to reimbursement of cost sharing and excepted benefits, including TRICARE supplemental premiums.

If such conditions are satisfied, the employer’s Medicare or TRICARE reimbursement arrangement will not be considered an impermissible employer payment plan and will not be subject to excise tax penalties for any failure to satisfy the ACA market reforms. However, it is important to note that while such arrangements may be allowed under Notice 2015-17, they may violate Medicare and TRICARE rules that prohibit employers from offering financial or other incentives to employees to decline employer-provided group health coverage. Employers should therefore be cautious about establishing these arrangements for their employees.

4.  Compensation Increases to Purchase Individual Health Coverage —Notice 2015-17 confirms that an employer’s increase of an employee’s compensation to assist the employee in purchasing health coverage in the individual market will not be considered an employer payment plan subject to the ACA market reforms as long as the compensation increase is not conditioned on purchasing health coverage and the employer does not otherwise endorse a particular policy, form or issuer of health insurance. Employers may therefore offer these types of compensation increases without triggering any ACA excise tax penalties.

5.  After-Tax Reimbursements of Health Insurance Prohibited —Notice 2015-17 explains that although an arrangement pursuant to which an employer pays for, or reimburses, an employee for health insurance premiums continues to be excludable from an employee’s income (as addressed in Revenue Ruling 61-146), such arrangements are group health plans that fail to satisfy ACA market reforms—regardless of whether the employer treats the money as being provided on a pre-tax or post-tax basis to the employee. Accordingly, any reimbursement of employee health insurance premiums (whether pre-tax or after-tax) is subject to excise tax penalties.

Based upon the foregoing, the circumstances in which employers may offer employer payment plans are severely limited. These arrangements must generally be replaced by, or in some cases integrated with, group health plans meeting the ACA’s requirements. Employers that continue to offer employer payment plans outside of the parameters described above will become subject to penalties.