On February 18, 2015, the Internal Revenue Service issued Notice 2015-17, which provides transitional relief from Affordable Care Act (ACA) excise taxes for violations of regulations involving the payment or reimbursement of health insurance premiums. The ruling resets the clock to pre-2014 practices until June 30, 2015.


For more than fifty years, employers who chose not to offer employees a group health plan have been permitted to pay employees health premiums directly or reimburse them subject to documentation. In September 2013, the Internal Revenue Service issued Notice 2013-54, which made this practice economically unfeasible because of potential ACA violations. Traditionally the cure for various violations had been to then treat related amounts as taxable income but this was a faulty understanding. In November 2014, the Department of Labor issued a joint FAQ with other government agencies administering the ACA, which was intended to clarify that ACA violations were the primary issue not taxability of health premiums. Fortunately, the Internal Revenue Service issued Notice 2015-17 on February 18, 2015, which acknowledges that their guidance was widely misunderstood providing relief from the ACA violations through June 30, 2015. Consequently, premiums paid directly or reimbursed may be treated as non-taxable income for 2014 and through June 30, 2015.

Click here to read a client alert prepared by Danny Miller and Allison Gardner, attorneys with Conner & Winters. Both Danny and Allison moderated the ECFA webinar on February 12 and are widely regarded experts in church and nonprofit employee benefits.

What does this mean for 2014 and early 2015?

If employers paid or reimbursed premiums subject to documentation, the payments may be excluded from taxable income on 2014 W-2’s and excluded through June 30, 2015. Practically speaking, churches and employees may want to amend W-2’s and 1040’s to realize this tax benefit.

Where do we go from here after June 30, 2015?

Regulations and interpretations are still forthcoming related to the Affordable Care Act and Congress or the Supreme Court may make changes beyond the Executive Branch. So stay tuned, but for now (February 23) we know this:

  1. Churches with just one employee may continue to reimburse or pay insurance premiums directly (subject to documentation) on a tax-free basis, even after June 30, 2015. This includes payments made for those on federal and state exchanges. These payments are exempt from the ACA regulations.
  2. Churches with more than one employee, but paying or reimbursing for one employee, should plan to consider the premium payments as taxable. However, it is possible for the premium payments to be considered non-taxable if those receiving the benefit are not the most highly compensated employee (generally the senior pastor). This nuanced approach should be vetted with tax advisors to make sure discrimination rules are not violated. The church should strongly consider the advice in #5 below.
  3. Churches with a group plan (both large and small) may pay health premiums directly on a pre-tax basis. However, these payments may be considered taxable if their participation is considered discriminatory.
  4. In most cases, churches paying or reimbursing premiums for coverage on a spouse’s employers plan should plan to consider the payments as taxable income. There is an exception allowing tax free treatment of spousal premiums if the church has a group health plan and a health reimbursement arrangement (HRA). If a group plan and HRA are not in place, the church should consider the advice in #5 below.
  5. Practically speaking, to avoid ACA violations, it is recommended that churches avoid mentioning healthcare in budget and employee packages unless is specifically clear that the payments do not violate ACA rules. If the payments need to be considered taxable income, add it to gross pay without spending restrictions. In other words, get out of reimbursing employees for healthcare. It is your safest option, if you are unclear.

Are taxable health insurance payments subject to social security or self-employment taxes?

Yes, up to the annual maximum taxable earnings limitations

Are payments to healthcare sharing ministries taxable?

This is a difficult question and is best left to the healthcare sharing ministry to answer. These plans walk a fine line between insurance and non-insurance. It is clear that they satisfy the ACA individual mandate, but they are not technically insurance. If clear written guidance cannot be provided by the ministry, it is best to consider them as taxable–even 2014 payments.

Are payments/reimbursements for healthcare costs other than premiums considered taxable (deductibles, co-pays, and allowances)?

Depends. Formal cafeteria plans approved by the IRS may be tax-free, otherwise payment should be considered taxable income. Cafeteria plans (section 125) include Health Savings Accounts (HSA’s), Medical Savings Accounts (MSA’s), and Flexible Spending Arrangements (FSA’s). Health Reimbursement Arrangements (HRA’s) may be provided by employers with less than two employees and those offering group health plans. So if a church has more than one employee without a group plan, the HRA option is not available. Guidance on these arrangements changes from time to time, and so it is a best practice to have them administered by a qualified third party (TPA).

If you have questions, contact Kevin Batman at batmank@wesleyan.org or call (317)774-3941.