IRS to End Section 4980D Healthcare Penalty Relief on June 30.

(Parker Tax Publishing June 8, 2015)

In Notice 2015-17, published February 18, 2015, the IRS provided transition relief, set to expire on June 30, from the assessment of $100 per day, per employee penalties under Code Sec. 4980D for small employers who reimburse or pay a premium for individual health insurance for an employee. Transition relief will remain in place until at least December 31, however, for S corps that have similar arrangements with 2-percent shareholder-employees. The IRS is expected to provide future guidance on whether the penalty applies in those situations.

Transition Relief Provided in Notice 2015-17

Historically, many small employers have favored "employee payment plans" where employees would choose their own insurance plans and employers would reimburse the costs over conventional group health plans. Structured properly, such arrangements provided many of the tax benefits of group health plans without the administrative burdens and high costs.

Pursuant to Notice 2013-54, the "employee payment plans" discussed above are considered to be group health plans that fail to meet certain market reform requirements under the Affordable Care Act ACA. As such, employers who reimburse the health insurance premiums of their employees are subject to a $100 per day, per employee penalty under Code Sec. 4980D (reaching up to $36,500 per employee, per year).

Notice 2015-17 provides limited transition relief for coverage sponsored by an employer that is not an Applicable Large Employer (ALE). Specifically, the notice provides that the excise tax under Code Sec. 4980D will not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for individual health policy premiums or Medicare Part B or Part D premiums (1) for 2014 for employers that are not ALEs during 2014, and (2) for January 1 through June 30, 2015 for employers that are not ALEs during 2015. After June 30, 2015, such employers may be liable for the excise tax.

Practice Tip: For employers who are unable to replace an employee payment plan with a conventional group health plan, Notice 2015-17 clarifies that there is an additional avenue for avoiding the Code Sec. 4980D penalty. The notice states that if, instead of providing reimbursements, an employer increases an employee's compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorses a particular policy, form, or issuer of health insurance), the arrangement will not be considered an employer payment plan and will not be subject to the penalty. While this is by no means a tax-efficient way to provide health insurance, an employer that still has an impermissible employee payment plan in place may find it attractive compared with paying a $100 per penalty, at least as a stopgap.

Transition Relief for Certain S Corp Healthcare Arrangements to Continue Until at Least December 31

Notice 2008-1 provides that if an S corporation pays for or reimburses premiums for individual health insurance coverage covering a 2-percent shareholder (as defined in Code Sec. 1372(b)(2)), the payment or reimbursement is included in income, but the 2-percent shareholder-employee may deduct the amount of the premiums under Code Sec. 162(l) (a "2-percent shareholder-employee healthcare arrangement").

The IRS acknowledged in Notice 2015-17 that it is unclear under the existing guidance whether such 2-percent shareholder-employee healthcare arrangements are subject to the market reforms and the associated penalties under Code Sec. 4980D.

Accordingly, the IRS stated in the notice that the excise tax under Code Sec. 4980D will not be asserted for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement until future guidance states that the penalty applies to such arrangements, and at the very least will not be asserted at any time prior to January 1, 2016. Further, unless and until such additional guidance provides otherwise, an S corporation with a 2-percent shareholder-employee healthcare arrangement will not be required to file IRS Form 8928 solely as a result of having a 2-percent shareholder-employee healthcare arrangement.

Single Participant S Corp Healthcare Arrangements Are Not Subject to Section 4980D Penalty

In addition, the IRS reiterated that Code Sec. 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two participants. Accordingly, arrangements covering only a single employee are generally not subject to the market reforms. However, if an S corporation maintains more than one such arrangement for different employees (whether or not 2-percent shareholder-employees), all such arrangements are treated as a single arrangement covering more than one employee so that the exception in Code Sec. 9831(a)(2) does not apply.

For this purpose, if both a non-2-percent shareholder employee of the S corporation and a 2-percent shareholder employee of the S corporation are receiving reimbursements for individual premiums, the arrangement would be considered a group health plan for more than one current employee. However, if an employee is covered under a reimbursement arrangement with other-than-self-only coverage (such as family coverage) and another employee is covered by that same coverage as a spouse or dependent of the first employee, the arrangement would be considered to cover only the one employee.

For a discussion of group health plan requirements, including the Code Sec. 4980D excise tax, see Parker Tax ¶ 195,500. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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