On Wednesday, February 18, the IRS released Notice 2015-17 which provides transitional relief from the $100 per day per employee penalty assessed under IRC §4980D for certain small employers. Additionally the notice provides clarification related to health insurance arrangements for 2% shareholder-employees of S corporations and group health plans with only one plan participant.
Transitional Relief for Small Employers
Employer payment plans as defined in IRS Notice 2013-54 which fail to comply with market reforms related to group insurance will be subject to a $100 per day per employee penalty under IRC §4980D. Notice 2015-17 provides relief from this penalty for small employers defined as an employer who has an average of less than 50 full-time employee (including full-time equivalent employees. The relief provides that no penalty will be assessed on small employers for 2014 or the first 6 months of 2015. Unless further relief is granted, employers will be subject to the penalty beginning July 1, 2015.
Employers qualifying for relief will not be required to file IRS Form 8928 for the periods such relief is available.
Since this relief only extends to June 30, 2015, employers with group health plans not currently in compliance with the market reforms should take the necessary steps now to bring their plans into compliance.
Note, this relief is not applicable to stand-alone Health Reimbursement Arrangements or other arrangements to reimburse employees for medical expenses other than insurance premiums.
2% Shareholder-Employees in S-Corporations
The IRS is considering issuing additional guidance on the application of the market reforms to group health plans under the Affordable Care Act which include 2% shareholder-employee healthcare arrangements (S corporation pays for or reimburses health insurance premiums for 2% shareholder-employee). Until such guidance is provided, Notice 2015-17 provides a group health plan will not be subject to the $100 per day penalty solely because the plan includes a 2% shareholder-employee healthcare arrangement.
Accordingly, S Corporation employers may continue to treat health insurance premiums paid or reimbursed for a 2% shareholder as box 1 income on Form W-2 (not subject to FICA or Medicare taxes), under prior IRS guidance and shareholders will continue to be allowed a deduction for AGI on their individual tax return (assuming all other deduction requirements are met).
Group health plans with only one participant
Notice 2015-17 confirms that market reforms do not apply to health plans with fewer than two plan participants who are current employees on the first day of the plan year. Therefore, an employer that covers only one employee (whether or not this is an owner), will not be subject to penalty under §4980D.
The IRS has also clarified that a current 2% shareholder employee is considered an employee for purposes of determining whether a health plan as two or more plan participants. This applies even though the 2% shareholder-employee healthcare arrangement is not currently subject to the market reforms as outlined above.
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