February 24, 2015
Small Employer Temporary Relief from
ACA Market Reform Excise Tax
In Brief
On February 18, 2015, the IRS provided temporary relief
from the $100 per day per employee excise tax applicable
to employer reimbursement or direct payment of
individual employee health insurance policy premiums
[Notice 2015-17]. The Notice eliminates this excise tax for
two categories of employers:


Small employers under 50 employees where the employer pays or reimburses premiums of
individual health insurance policies of employees for the period January 1, 2014 through June
30, 2015.
2% shareholder-employees of S corporations whose individual health insurance policy
premiums are paid or reimbursed by the S corporation, for the period January 1, 2014
through December 31, 2015.
Background
In our Farm Tax Network release issued December 30, 2014 , we advised that the ACA market reform
rules effectively ended the ability of an employer to use either a Section 105 medical reimbursement
plan or a Section 106 reimbursement of health insurance premiums. These plans violate the ACA
market reforms codified in Secs. 9801-9834, and result in a $100 per day per employee penalty under
Sec. 4980D. In order to avoid this expensive excise tax, our advice was to end these reimbursement
arrangements, effective as of the first day of the health plan year beginning in 2014, and treat any
prior reimbursements as taxable compensation. However, if there was only one employee in the
employer health reimbursement arrangement, an exception applied to the market reform penalty.
With respect to 2% S corporation shareholders, we pointed out the conflicting guidance from the IRS.
The S corporation is directed to reimburse individual health insurance premiums of shareholderemployees to preserve the 100% self-employed health insurance deduction in the Form 1040 of the
shareholder-employee [Notice 2008-1]. But the ACA market reform rules prohibit these
reimbursements. Our advice in December was to treat the S corporation reimbursements as taxable
for FICA and Medicare Tax (collectively, “FICA”) purposes (in addition to the longstanding treatment of
reporting these reimbursements as income tax wages), in order to better defend against the market
reform penalty.
Transition Relief for S Corporation 2% Shareholder-Employees
Notice 2015-17 states that the market reform excise tax (i.e., the $100 per day per employee penalty)
will not be assessed to an S corporation that is reimbursing or directly paying the health insurance
premiums of a 2% shareholder. This relief applies through the end of 2015. Absent any future
guidance from the IRS, S corporations may continue to rely on Notice 2008-1 during this period (i.e.,
report the reimbursement as box 1 income tax wages on the shareholder-employee W-2, but not
subject to FICA taxes in boxes 3 and 5). Further, the S corporation is not required to file IRS Form
8928, which is used to self-assess the $100 per day per employee penalty, solely because the S
corporation has a reimbursement arrangement for 2% shareholder health premiums. As a result,
there is no risk of the market reform penalty to a 2% S shareholder whose health insurance premiums
are reimbursed for both 2014 and 2015. The Notice also clarified that the one-employee-participant
exception to the market reform rules is allowed even if the employee receives family health insurance
coverage that includes a spouse or dependent who is also an employee of the S corporation.
Compliance Remedies
Under the relief of Notice 2015-17, we are entitled to continue the reimbursement of 2% S
shareholder premiums and to fully follow the guidance of IRS Notice 2008-1. Accordingly, S
corporation shareholder-employee health insurance reimbursements are not subject to FICA taxes for
both 2014 and 2015. S corporations that have already issued 2014 Forms W 2 to shareholders and
incurred the FICA are entitled to amend by filing Form 941 X or 943 X to recover the excess FICA. Note
that the IRS compliance procedures for amending the Form 941 or 943 require the employer to secure
a written statement of consent from the affected employee, because the employer is seeking
recovery of both the employer and employee portions of FICA. The employer also needs to consider
the need to amend FUTA and SUTA reports for 2014 for what are now tax-exempt health insurance
reimbursements. The Form 1040 of the employee-shareholder generally will not change from this
amended W-2 (absent an excess FICA computation or other SE income), because the premium
reimbursement was already reported in box 1 of the W-2 as wages for income tax purposes. But the
employer should issue a corrected Form W-2C to reflect the reduced FICA in boxes 3 and 5.
Transition Relief for Small Employers
Notice 2015-17 provides relief from the $100 per day per employee excise tax for a small employer,
defined as one who employed on average fewer than 50 full-time employees (including full-time
equivalent employees) during the prior year. The relief applies to employers who directly pay or
reimburse employees for individual health policy premiums, as well as reimbursing Medicare Part B or
Part D premiums. The transition relief from the penalty is available for 2014 and from January 1
through June 30, 2015. During this transition relief period, there is no requirement for the employer
to file IRS Form 8928 for assessment of the market reform penalty.
Compliance Remedies
Employers that reimbursed employee individual health insurance premiums during 2014 likely
reported those premiums for 2014 as taxable wages to the employee. To take advantage of this
transition relief, the employer should consider amending those W-2 forms and payroll tax reports to
remove the insurance premium reimbursements from taxable wages. Those reimbursements qualify
as a tax-free fringe benefit under Section 106, but were reported as taxable wages as a mechanism to
avoid the ACA market reform excise tax. Now that that excise tax is eliminated for 2014, the employee
can receive the Section 106 tax-free fringe benefit treatment. In some cases, this could represent a
significant reduction in 2014 taxable income with respect to a particular employee’s W-2 statement.
The employer needs to consider filing amended Forms W-2C for the affected employees and Forms
941-X or 943 X to recover the FICA paid on these reimbursements. State W-2 forms also may need to
be amended. Also, the employer needs to consider the merits of amending to recover FUTA and SUTA
taxes paid for 2014 on what are now tax-free health insurance reimbursements.
Caution: Amended payroll reports can be filed in cases where the employer actually reimbursed or
paid employee health insurance premiums during 2014. On the other hand, if the employer initiated a
general compensation increase in 2014 in lieu of providing health reimbursements, amended payroll
reports may not be filed (i.e., the Section 106 income exclusion requires an actual health insurance
payment or reimbursement by the employer).
The relief from the $100 per day per employee penalty only applies to employer health insurance
premium reimbursements; it does not apply to stand-alone Section 105 health reimbursement
arrangements or other reimbursements for medical expenses other than insurance premiums.
Reimbursing Medicare Premiums
The Notice provides that an employer who reimburses or pays directly some or all of Medicare Part B
or Part D premiums for employees has created a group health plan subject to the market reform
excise tax if the arrangement covers two or more active employees. However, these reimbursements
qualify for the transition relief through June 30, 2015, as discussed above. Also, the Notice provides a
method for integrating a Medicare premium reimbursement with an ACA-compliant employerprovided group health plan [Notice 2015-17, Q&A-3].
Taxable Compensation Alternative
The Notice provides that if an employer increases an employee’s compensation, but does not
condition the extra compensation on the purchase of health coverage or otherwise endorse a
particular policy or issuer of health insurance, the employer has not violated the market reforms.
However, if the employer is actually reimbursing or paying directly for the purchase of an individual
insurance policy for employees after July 1, 2015, the employer has violated the market reforms,
whether the employer treats the payment as tax-free or taxable to the employee [Notice 2015-17,
Q&A-4 and 5]. This guidance conforms to the earlier November 6, 2014 DOL Q&A, which similarly
indicated that premium reimbursements treated as taxable wages do not sidestep the market reform
penalty.
Summary
Notice 2015-17 provides valuable short-term transition relief from the $100/day/employee market
reform penalty for premium reimbursements. But it does not eliminate this sanction for periods after
July 1, 2015, and provides no long term resolution of S shareholder-employee premium
reimbursements. Further, it provides no relief whatsoever for Section 105 medical reimbursement
plans. And finally, because this guidance was issued after 2014 W-2s and other payroll tax compliance
was completed, it is sure to cause frustration on the part of employers and tax professionals.