IRS provides some reassurance on application of excise tax to employer payment plans

Certain transitional relief previously issued regarding the excise tax under Code Sec. 4980D will continue for employer payment plans instituted for 2-percent shareholder employees and for ones with fewer than two participants who are current employees on the first day of the plan year, according to a recent IRS letter to the office of U.S. Rep. Justin Amash (R-Mich.). Employer payment plans, under which an employer reimburses or directly pays an employee for premium expenses incurred for an individual health policy are considered by the IRS to be group health plans that fail to comply with Patient Protection and Affordable Care Act’s (ACA) (P.L. 111-148) market reforms. They are typically, therefore, subject to an excise tax under Code Sec. 4980D.

Coverage for 2-percent shareholders. However, transition relief for small employers from the excise tax was provided in IRS Notice 2015-17 (I.R.B. 2015-14), and much of that relief expired on June 30, 2015. According to Notice 2015-17, no excise tax would be asserted for any failure to satisfy the above ACA market reforms for a healthcare arrangement provided for 2-percent shareholder employees, pending subsequent guidance. The IRS now states that, because no other guidance has been issued, taxpayers may continue to rely on IRS Notice 2008-1 (I.R.B. 2008-2) for tax treatment of health coverage provided to 2-percent shareholder employees.

Coverage for only one employee. This latest guidance does not apply for coverage of employees who are not 2-percent shareholders. However, the IRS points to Q&A 5 of IRS Notice 2015-17, which discusses the application of market reforms to health plans with fewer than two participants who are current employees.

IRS Notice 2015-17 provides that the pertinent market reforms do not apply to group health plans with fewer than two participants who are current employees on the first day of the plan year, so that, whether or not a reimbursement arrangement such as an employer payment plan is considered to be a group health plan, it would not be subject to the excise tax for failing to satisfy the market reforms, according to an exception found in Code Sec. 9831(a)(2). The IRS cautions that if an S Corporation maintains more than one such arrangement for different employees (including 2-percent shareholder employees), the Code Sec. 9831(a)(2) exception does not apply. In that case, if both a non-2-percent shareholder employee and a 2-percent shareholder employee receive reimbursements for individual premiums, that arrangement would be considered by the IRS to be a group health plan for more than one current employee.

The IRS also added that the rules for group health plans with fewer than two participants who are current employees is a permanent rule.

SOURCE: IRS Information Letter 2016-0021, March 25, 2016 (release date).

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