New IRS guidance (Notice 2015-17) provides temporary relief from the steep Sec. 4980D excise tax penalty to small employers who pay or reimburse employees for individual health insurance premiums, or Medicare Part B or Part D premiums. Without this temporary reprieve, the excise tax penalty could cost as much as $100 per day, per employee, plus any applicable wage taxes, interest and related penalties.

The IRS issued the notice on February 18, 2015. The relief period for small employers (those with fewer than 50 full-time equivalent employees) includes 2014 and the first six months of 2015. The relief does not extend to any arrangements to reimburse employees for medical expenses other than insurance premiums.

The new guidance also provides relief to reimbursement plans for 2% S corporation shareholder-employees. These plans are not subject to the excise tax penalty at least through the end of 2015, and after that until the IRS releases further guidance.

Earlier guidance

The relief is related to earlier federal guidance issued in November 2014. The November guidance clarified IRS Notice 2013-54 and said that health reimbursement arrangements (HRAs) or other medical reimbursement plans are subject to the same legal requirements as a group health plan and must follow ACA implementation rules, or else they will face the Sec. 4980D excise tax penalty.

Relief is temporary, so employers must review their plans

The relief period ends on June 30, 2015, and small businesses will be subject to the excise tax penalty if they are not compliant after that. To avoid future penalties, you may need to revise or even terminate your HRA and/or make payroll tax adjustments. We recommend you contact Armanino Tax Partner Dan Jones to discuss the IRS guidance and how it affects your business.