Thursday, February 19, 2015

IRS Penalty Relief for Small Employer Insurance Reimbursement

2015 will have to go down as the year of major IRS announcements made during busy season. Last week, the IRS granted relief from having to file 3115 for many of our clients (Revenue Procedure 2015-20). This week in Notice 2015-17 the IRS made an equally impressive announcement regarding health insurance reimbursement for small employers.
Employer payment plans have been a very popular way for small business employers to provide insurance for their employees. This is because the premiums for group health plans are either too expensive and/or the employees like to have their own plans. The employer either pays the premiums directly or reimburses the employee for the premiums paid. The employer gets a deduction and the premiums are a tax-free benefit for the employee.

In IRS Notice 2013-54, the service virtually obsoleted the use of employer payment plans where there was more than one employee involved in such a plan. The Section 4980D penalty for noncompliance is $100 per employee per day – $36,500 effective January 1, 2014.

Both the IRS and DOL have posted information on their respective websites about IRS Notice 2013-54 . Yet there is still a lot of confusion, concern about potential penalties that could drive a company out of business and many unanswered questions regarding 2% S shareholders, reimbursement for Medicare, etc.

IRS Notice 2015-17:
Here are the major points of this new announcement:
  1. Penalty relief for small employers in 2014 and through June 30, 2015:
·         The IRS will not penalize small employers (less than 50 full–time equivalent employees) who have an employer payment plan or reimburse for Medicare.
·         After June 30, 2015, employers may be subject to the penalty. But at least for now we can take the deductions, exclude the premiums from employees’ income and not worry about the potential fine.
  1. 2% S shareholders relief:
·         No penalties will be assessed for 2014 and 2015 on S corporations who reimburse insurance for 2% shareholders.
  1. 2% S shareholders above-the-line deduction:
·         2% S shareholders can continue taking an above-the–line deduction for insurance premiums paid including reimbursed premiums. Remember, to the extent a 2% shareholder receives the Premium Assistance Credit for buying insurance on a government exchange, the deduction must be adjusted pursuant to Revenue Procedure 2014-41.
  1. The one-employee exception:
·         The restrictions on having an employer payment plan as addressed in IRS Notice 2013-54 do not apply where the plan has only one participant who is an employee on the first day of the year.

In this notice, the IRS clarified that where an employee is covered under a reimbursement with other than self-only coverage (such as a family plan) and another employee is covered under that plan as a spouse or dependent of the first employee, then that plan is deemed to cover only one employee. Therefore this plan would not be in violation and there would be no penalty.

If an S corporation maintains more than one reimbursement arrangement for different employees, all the arrangements are treated as a single arrangement covering more than one employee, so the one-employee exception would not apply. This situation would result in penalties once the relief periods expire.

The good news is that we have general penalty relief through June 30, 2015, and for 2% shareholders through all of 2015. We need to be planning for what happens after June 30, 2015. Does your client offer a group plan? Does the client just pay more salary? The employees won’t like the extra income tax and FICA tax they have to pay. What about other options as marketed by certain benefit companies?

We will be discussing all of this in upcoming seminars and webinars.

For now, enjoy this good news.

For further details on the notice and what the potential tax implications are, click here to view or download the IRS article (PDF)