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Notice 2015-17: Small-Scale Excise Tax Relief for Small Employers

On February 18, 2015 the Internal Revenue Service issued Notice 2015-17, which provides temporary relief from the excise tax under Code section 4980D for employer programs that reimburse employees for the cost of health insurance coverage purchased on the individual market (including coverage obtained through an Exchange). The Notice also extends limited excise tax relief to health care arrangements covering 2-percent shareholder-employees, employer reimbursements of Medicare Part B or D premiums, and programs that reimburse the medical expenses of employees enrolled in TRICARE. The Notice provides a brief but welcome respite for small employers that wish to reimburse employees for the cost of obtaining individual health insurance policies (on a pre-tax basis) rather than maintaining a group health insurance plan.


Joint guidance issued by the IRS and Department of Labor on September 13, 2013 (Notice 2013-54 and DOL Tech. Rel. 2013-03) provides that certain health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), and arrangements that reimburse employee premiums for medical insurance purchased on the individual market (dubbed Employer Payments Plans or "EPPs") are group health plans that must comply with the market reforms under the Affordable Care Act (ACA). By their nature, these arrangements fail to comply with the ACA market reforms that prohibit annual and lifetime dollar limits (Public Health Service Act § 2711) and require plans to provide cost-free preventive services (PHSA § 2713). As a result the IRS has made it abundantly clear that such programs are subject to an excise tax of $100 per affected individual per day under Code section 4980D as plans that fail to satisfy ACA market reforms.

The September 2013 guidance significantly limits the utility of general-purpose HRAs that are not integrated with a group health plan (according to one of the two methods outlined in Q/A #4 of Notice 2013-54) and FSAs that do not qualify as excepted benefits with respect to the type of benefits provided through companion group health plan coverage and the maximum benefit payable (as discussed in Q/A #7 of Notice 2013-54). The guidance also eliminates the ability of employers to fund EPPs by making pre-tax dollars available for employees to purchase health coverage on the individual market (presumably under Revenue Ruling 61-146), a method of contributing to employee healthcare costs that is popular among small employers. The guidance is a particularly hard pill to swallow for small employers with EPPs because it seems to run counter to the stated intent of the ACA by creating a disincentive for employers to assist employees in obtaining health insurance benefits.

Temporary Relief Provided

Notice 2015-17 provides small employers that fund EPPs with relief from the excise tax imposed by Code section 4980D through June 30, 2015. The Notice provides this temporary relief because the Small Business Health Options Program (SHOP) Marketplace and other health insurance alternatives available to small employers are not yet fully developed. For purposes of the Notice, an employer is considered a small employer entitled to the relief so long as it is not an "applicable large employer" that employed an average of at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year. SeeTreas. Reg. §§ 54.4980H-1(a)(4) and -2. Importantly, the relief is limited to programs that reimburse premiums and does not extend to stand-alone HRAs and similar arrangements that reimburse employees for other medical expenses.

The relief provided by Notice 2015-17 is not limited to small employers. The notice extends excise tax relief (through the end of 2015) to health care arrangements under which an S corporation pays for individual health insurance coverage for 2-percent shareholder-employees (or reimburses such employees for the cost of coverage). The Notice also extends permanent relief to arrangements through which employers reimburse Medicare premiums (for Part B or D), or pay for medical expenses for employees enrolled in TRICARE if such arrangements are integrated with another employer group health plan offered by the employer as determined by specified criteria.

Finally, the Notice clarifies that an increase to an employee's compensation will not constitute a group health plan subject to ACA market reforms so long as the employer does not condition the additional compensation on the employee's purchase of health coverage and does not endorse a particular policy, form, or issuer of health insurance. The Notice draws a clear line between such compensation increases and arrangements described in IRS Revenue Ruling 61-146, where an employer reimburses employees or pays an insurer directly for premium expenses attributable to the purchase of a health insurance policy on the individual market. The latter arrangements, although excluded from an employee's gross income under Code section 106, are still considered group health plans that fail to satisfy the ACA market reforms.


The relief provided by Notice 2015-17 allows small employers only a short period of time (approximately 4 ½ months) to continue the now disfavored method of contributing to the cost of their employees' health insurance coverage on a tax-favored basis. It is possible, however, that relief could be extended or expanded as a result of political pressure surrounding the ACA. Indeed, in 2014 legislators made several inquiries challenging the September 2013 guidance and introduced legislation that would permanently exempt stand-alone HRAs and EPPs offered by small business from the ACA market reforms. These attempts were met with the now well-established response from the IRS that such arrangements do not comply with market reforms and, thus, are subject to the excise tax under Code section 4980D. As it is uncertain whether a permanent legislative solution will evolve, small employers should take advantage of the new compliance window to search for an alternative means of contributing to employee healthcare costs if they chose to do so.

Topics: Health and Welfare Plans