In late 2013, the Internal Revenue Service issued Notice 2013-54, which indicated employers, including churches, would face a $100 per day per employee penalty as a result of the Affordable Care Act if they continue to pay for the cost of private health insurance for its employees.
The IRS has now issued new guidance—IRS Notice 2015-17—that provides temporary relief from the penalty and sets a new date of July 1, 2015, for employers to comply.
Churches that have used an employer payment plan in the past, or that are using one now, should bear in mind the following ten points:
1. Such plans trigger a significant penalty of $100 per day per affected employee. This penalty applies to any employer payment plan adopted since January 1, 2014.
2. Employers with fewer than 50 full-time equivalents since January 1, 2014, are eligible for transitional relief announced by the IRS in Notice 2015-17. This means that they will not incur the $100 per day per employee penalty for operating an employer payment plan at any time from January 2014 through the first half of 2015. However, the penalty will be imposed thereafter, so you should discontinue any existing employer payment plan and consider other means of providing health coverage for your employees. One way that was approved by the IRS in Notice 2015-17 is to implement a plan that “increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance).”
3. “Large employers” (having 50 or more full-time employees) should terminate their employer payment plan immediately since they are not eligible for transition relief from the $100 per day per affected employee penalty. It is imperative that these employers consult with a tax professional to minimize or avoid the risk of triggering the penalty.
4. The Affordable Care Act imposed an additional penalty on “large employers” that did not offer a group health plan to employees by January 1, 2015. This deadline was later postponed to January 1, 2016, for employers with 50 to 99 employees. In anticipation of this requirement, many, if not most, larger employers already have implemented a group health plan compatible with the Affordable Care Act’s market reforms. This will minimize, and in some cases avoid, the $100 per day penalty for these employers.
5. In the past, some employers thought that they could avoid the $100 per day penalty by treating their payment or reimbursement of employee health insurance as a taxable fringe benefit reported on Forms W-2 and 941. Employees of churches that followed this practice in 2014 should discuss with a tax professional the possibility of claiming a tax refund. The reasoning is that employer payment plans technically remain a nontaxable fringe benefit. Revenue Ruling 61-146 and section 106 of the federal tax code were not repealed or revoked by the Affordable Care Act. Few, if any, employers will continue providing this benefit to employees because it will trigger the $100 per day penalty. But, employers with fewer than 50 employees are eligible for transitional relief from this penalty for 2014 and the first half of 2015. This means that employees whose W-2 reported the amount of their employer’s payment or reimbursement of personal health insurance may be entitled to a refund. Check with your tax professional for further details.
6. IRS Notice 2015-17 affirms that the $100 per day penalty can be avoided if an employer simply “increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance).” Similarly, Notice 2013-54 provides that an employer payment plan “does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the (Department of Labor’s) regulation 2510.3-1(j) are met.”
7. Notice 2015-17 clarifies that employers eligible for the transitional relief that have employer payment plans are not required to file IRS Form 8928 to qualify for the relief. Form 8928 is the form used by employers to report the $100 per day penalty tax for failing to comply with the market reforms under the Affordable Care Act.
8. An arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees constitutes an employer payment plan, as described in Notice 2013-54, and, if such an arrangement covers two or more active employees, is a group health plan subject to the market reforms. An employer payment plan may not be integrated with Medicare coverage to satisfy the market reforms because Medicare coverage is not a group health plan.
9. The $100 per day penalty applies to all employers, including—but not limited to—religious employers. Employer payment plans have been popular not just among churches, but also among small for-profit employers. As awareness of this penalty builds, Congress has come under mounting pressure to provide permanent relief. Several employer groups and trade associations are lobbying Congress for change, including the National Association for the Self-Employed. Some members of Congress are taking notice. Senator Charles Grassley (R-IA) recently observed:
I’ve heard from several Iowa small business owners who feared they could be subject to thousands of dollars in penalties simply because they helped their employees pay for health insurance in 2014. For these and other affected businesses, the penalty relief is welcome news, but ultimately it only delays the inevitable. Small businesses are still prohibited from reimbursing their employees to purchase health insurance. It’s just a matter of when they have to come into compliance with the law. Small businesses and their employees still will be hurt going forward. Congress has to fix this problem.
Any developments will be reported in future issues of this newsletter and posted to our website ChurchLawAndTax.com.
10. The principal author of Notice 2015-17 is Shad Fagerland of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, Fagerland may be reached at (202) 317-5500 (not a toll-free call). Additional questions regarding this information may be directed to the IRS at (202) 317-6846 (not a toll-free call).