In fall 2013 the IRS issued Notice 2013-54 to provide guidance on how the market reforms of the Affordable Care Act (ACA) apply to health reimbursement arrangements (HRAs). That guidance provided that an HRA that is used to purchase health coverage on the individual market will fail to comply with the annual dollar limit prohibition of the ACA.

Beginning in 2014, this failure results in a penalty of $100 per day, per affected employee (i.e., $36,500 per employee for an entire year). Read more about Notice 2013-54.

After issuing that guidance, the IRS determined that small employers have historically offered health coverage to their employees through an arrangement that directly pays or reimburses employees for the premium cost of an individual health insurance policy. As a result, under Notice 2013-54, these small employers would be subject to the penalty of $100 per day, per affected employee, beginning in 2014.

In Notice 2015-17, the IRS announced transition relief for small employers that sponsor an “employer payment plan.” An employer payment plan is a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health policy or directly pays a premium for an individual health insurance policy covering the employee (including Medicare Part B or Part D premiums).

Under the transition relief, a small employer that sponsors an employer payment plan is not subject to the penalty of $100 per day, per affected employee during 2014 or through June 30, 2015. This means small employers that still sponsor employer payment plans have until the end of June 2015 to remove the plans.

Whether an employer is a small employer for a calendar year is determined by the number of employees during the preceding calendar year. For purposes of the transition relief, a small employer for 2014 and 2015 is an employer that had less than 50 full-time plus full-time equivalent employees during 2013 and 2014, respectively. An employer may elect to make the determination based on any consecutive six-month period rather than the entire calendar year.

This transition relief doesn’t apply to a standalone HRA or other arrangements to reimburse employees for medical expenses other than insurance premiums.

Notice 2015-17 provides other guidance including that until future guidance is issued, and until at least Dec. 31, 2015, the penalty of $100 per day, per affected employee will not apply to any failure to satisfy the ACA market reforms by a health care arrangement that covers only 2% of shareholders in an S corporation.