The Affordable Care Act (“ACA”) included various insurance market reforms that apply to health insurance plans. An excise tax is imposed on any “group health plan” that fails to meet certain market reform requirements, such as, for example, rules related to pre-existing condition exclusions. The excise tax, also known as the “Market Reform Penalty,” is potentially debilitating for a business, up to $100 per affected person, per day.

Employer Payment Plan. One arrangement that can trigger the Market Reform Penalty is an “employer payment plan.” Essentially, an “employer payment plan” refers to a group health plan under which an employer either (i) reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or (ii) directly pays a premium for an individual health insurance policy covering the employee.

IRS Guidance and Confusion. IRS Notice 2013-54, issued in the fall of 2013, indicated that an employer payment plan would trigger the Market Reform Penalty. In May of 2014, the IRS issued follow up guidance to confirm and explain its position under Notice 2013-54. At that point, questions remained regarding whether the Market Reform Penalty would apply if an employer reimbursed an employee for health insurance premiums with after-tax dollars. Subsequent guidance issued by the Department of Labor (“DOL”) in November 2014 appeared to address the issue, indicating that an impermissible arrangement exists where a payment by an employer to or on behalf of an employee depends, in any manner, on the health insurance decisions of the employee, even where reimbursements are made with post-tax dollars.

Additional Guidance. In early spring of 2015, the IRS, DOL and the Department of Health and Human Services issued joint guidance to clarify the situation. Among other things, IRS Notice 2015-17 clarified that any arrangement where an employer makes any payments (regardless of the mechanism by which such payment is made, including reimbursements or direct premium payments) for individual health insurance premiums, creates an employer payment plan which cannot satisfy the ACA market reforms, without regard to whether the employer treats the money as pre-tax or post-tax to the employee.

Clarification and Transition Relief for Small Employers. IRS Notice 2015-17 also provided clarification and certain transition relief for small employers.

Clarification. Many small employers which fall below the “applicable large employer” threshold (below 50 full time employees, including full time equivalent employees) continue to consider whether they should terminate their employee health insurance plan and allow their employees to go to the health insurance exchange. IRS Notice 2015-17 clarifies that an employer does not create an impermissible payment plan if the employer increases an employee’s compensation. An important caveat however, is that any increase in an employee’s compensation may not be conditioned on the purchase of health coverage or otherwise endorse a particular policy, form, or issuer of health insurance.

Transition Relief. Small employer transition relief under IRS Notice 2015-17 provides that the Market Reform Penalty will not be asserted until June 30, 2015 against employers that are not “applicable large employers,” as defined under the ACA, for failure to satisfy the market reforms by employer payment plans that pay or reimburse employees for individual health policy premiums or Medicare part B or Part D premiums. After June 30, 2015, however, all employers that maintain an impermissible employer payment plan will be liable for the Market Reform Penalty.

Yesterday, the ACA survived Supreme Court scrutiny for the second time and appears here to stay. Appropriate planning is very important. Please contact your Sirote advisor to consider how the termination of this transition relief may impact your business, and what options are available to minimize health insurance costs and penalties.