The Supreme Court’s recent ruling upholding the legality of Obamacare premium subsidies in states that don’t run their own health insurance exchanges breathed new life into the ACA and tells us, somewhat definitively, that Obamacare is here to stay. With Obamacare comes a barrage of penalty provisions, including a $100 per-employee per-day penalty on employer payment arrangements. Back in February, the IRS issued a small business -- fewer than 50 workers -- exemption for this penalty (Notice 2015-17). That exemption expires June 30, 2015. Effective July 1, small businesses that continue to use reimbursement plans will be assessed a $100/day/affected participant. Obviously, the time to get into compliance with the ACA is now. Here’s where we stand:
The $100/employee/day penalty generally applies to all employer payment arrangements.
Employer payment arrangements have long been a popular way for small businesses to help employees obtain health coverage without the difficulties and expense involved in furnishing a full-fledged company health insurance plan. Under an employer payment arrangement, the employer reimburses participating employees for premiums paid for their individual health insurance policies or pays the premiums directly on behalf of participating employees.
With a few limited exceptions, such plans fail to meet ACA requirements. According to IRS, an employer arrangement that reimburses or pays for employee individual health premiums is considered a group health plan and is subject to the $100 per-employee per-day penalty, whether the arrangement is treated by the employer as before-tax (tax-free to the employee) or after-tax (taxable to the employee).
One-employee arrangements are exempted.
A bit of good news for the very small business: the $100/employee/day penalty cannot be assessed on employer payment arrangements that have only one participating employee. Therefore, your business can still use such an arrangement to reimburse one employee for his or her individual health insurance premiums without triggering the expensive penalty mentioned above.
Temporary relief for s corporations lasts through year-end (sort of).
Many S corps have set up employer payment arrangements to cover individual health policy premiums for employees who also own more than 2% of the company stock (more-than-2% shareholder-employees). Unfortunately, such S corporation arrangements run afoul of the ACA market reform restrictions and can therefore trigger the punitive $100 per-employee per-day penalty. IRS Notice 2015-17 exempts such plans from the $100/employee/day penalty for health premiums reimbursed or paid by S corporations between Jan. 1, 2014 and Dec. 31, 2015. Through year-end, therefore, there is no risk of incurring the penalty for S corporation employer payment arrangements that benefit only more-than-2% shareholder-employees. However, S corporation employer payment arrangements that benefit other employees are still exposed to the penalty.
Given the steep penalties involved here, we cannot emphasize enough the need for small businesses to get compliant with ACA guidelines immediately. There are many healthcare options available, and we urge you to seek guidance on the matter to ensure the well-being of your business.