IRS Notice 2015-17: Expired Relief and the S Corp Exception

IRS Notice 2015-17 was transition guidance that spared small employers from the Affordable Care Act’s steep excise tax when they reimbursed employees for individual health insurance premiums through arrangements that violated the ACA’s market reforms. The general small-employer relief covered January 1, 2014 through June 30, 2015 and has expired. A separate provision in the same notice, covering S corporations that pay or reimburse health premiums for shareholders who own more than 2 percent of the company, has no announced end date and is still the operative rule today.

Why the Notice Existed

Before the ACA, small businesses routinely reimbursed employees for individual health insurance premiums or paid the premiums directly to the insurer. Treasury and the IRS acknowledged that many small employers did not realize these longstanding practices had become illegal.¹ The IRS classifies these “employer payment plans” as group health plans, which then have to satisfy ACA market reforms such as the prohibition on annual dollar limits for essential health benefits and the requirement to cover preventive services without cost-sharing.² A reimbursement capped at, say, $400 per month is inherently an annual dollar limit, so the arrangement fails on its face.

The consequence is Section 4980D of the Internal Revenue Code: a $100-per-day excise tax for each affected individual.³ Five employees, a full year, and the exposure is $182,500. Notice 2015-17 paused that penalty for eligible small employers so they could transition to compliant benefits.

Who Qualified as a Small Employer

The notice used the same size test as the ACA’s employer mandate. A small employer averaged fewer than 50 full-time employees, including full-time equivalents, on business days during the preceding calendar year. Full-time equivalents are the total monthly hours worked by part-time employees divided by 120, added to the full-time headcount.⁴ Larger employers got no comparable grace period under this notice.

The Relief Windows That Have Closed

For 2014, qualifying small employers were excused from the Section 4980D excise tax on employer payment plans that reimbursed individual premiums. For 2015, the same relief ran only through June 30.¹ After that date, the excise tax applied in full. Any small employer that kept reimbursing individual premiums through an ordinary employer payment plan past mid-2015, without switching to one of the compliant structures described below, has been accruing potential liability ever since.

The S Corporation Provision That Still Applies

S corporations that pay or reimburse health insurance premiums for shareholders owning more than 2 percent of the company stock got a distinct, open-ended piece of relief. Under Section 1372 of the Code, these shareholders are treated as partners rather than employees for fringe benefit purposes, which produces unusual tax treatment for their health coverage.⁵

Notice 2015-17 states that the Section 4980D excise tax will not be asserted against 2-percent shareholder-employee healthcare arrangements until the IRS issues further guidance, and in any event through the end of 2015.¹ No such guidance has been issued. The IRS has confirmed that S corporations and their shareholders may continue to rely on the earlier Notice 2008-1 for the tax treatment of these arrangements.⁵ That makes the S corporation piece the most practically useful part of the notice today.

How to Structure the S Corporation Arrangement

To qualify, the S corporation must report the premium payments as wages on the shareholder-employee’s Form W-2.¹ Two setups are acceptable: the corporation pays the insurer directly, or the shareholder pays the premium and submits proof to the corporation for reimbursement in the same tax year.⁶ Either way, the premiums go into W-2 wages and get reported as gross income on the shareholder’s individual return.

Those premiums are subject to income tax withholding but, when Section 3121(a)(2)(B) is satisfied, not to Social Security and Medicare taxes.⁶ Once the wages are reported correctly, the shareholder can claim the self-employed health insurance deduction under Section 162(l), which expressly applies to individuals treated as partners under Section 1372.⁷ The deduction cannot exceed the shareholder’s earned income from the S corporation and is unavailable for any month the shareholder is eligible for a subsidized employer plan.

If the corporation neither pays nor reimburses the premiums, or fails to include them in the shareholder’s W-2, the plan is not considered established by the S corporation and the shareholder loses the Section 162(l) deduction entirely.⁶ Keep the shareholder’s proof of payment, the W-2 showing premiums in wages, and documentation that ownership exceeds 2 percent. Those records matter if the arrangement is ever questioned. S corporations relying on this provision are not required to file Form 8928 solely because of these shareholder arrangements.⁵

Compliant Ways to Reimburse Individual Premiums Now

For everyone other than 2-percent S corporation shareholders, a plain employer payment plan is still non-compliant. Two health reimbursement arrangement structures created after Notice 2015-17 now let employers reimburse individual premiums legally.

Qualified Small Employer HRA

The 21st Century Cures Act created the QSEHRA in December 2016.⁸ The statute excludes a QSEHRA from the definition of a group health plan, so the ACA market reforms that sank the old arrangements do not apply.⁹ To offer one, the employer must have fewer than 50 full-time equivalent employees and no group health plan for any employee.

The employer funds it entirely; no salary reductions. Reimbursement amounts can vary only by employee age and family size and must be offered on the same terms to all eligible employees. For 2026, the annual limits are $6,450 for employee-only coverage and $13,100 for family coverage.¹⁰ Employees must show proof of health insurance before being reimbursed. Employers must give eligible employees written notice at least 90 days before each plan year, or on the date a new employee becomes eligible. Missing the notice costs $50 per employee, up to $2,500 per year.⁸

One boundary matters here. 2-percent S corporation shareholder-employees are not eligible to participate in a QSEHRA.⁵ Those shareholders keep using the Notice 2015-17 arrangement with W-2 reporting.

Individual Coverage HRA

The ICHRA has been available since 2020 and works for employers of any size.¹¹ There is no cap on the reimbursement, and employers can vary contributions and eligibility by defined classes of employees such as hourly versus salaried. Employees must be enrolled in qualifying individual coverage, which includes Marketplace plans, plans bought directly from an insurer, and Medicare Parts A and B or Part C, but not short-term or limited-benefit plans. Employers give written notice at least 90 days before each plan year and let employees opt out annually.

Applicable large employers using an ICHRA must meet ACA affordability standards. For 2026, the ICHRA is affordable if the employee’s remaining monthly cost for the lowest-cost silver plan in their area, after the ICHRA reimbursement, is less than 9.96 percent of one-twelfth of household income.¹¹ Both HRA types can also reduce or eliminate an employee’s premium tax credit eligibility, which is why the written notices exist.

Exposure for Employers That Never Switched

An employer that kept reimbursing individual premiums after June 30, 2015 without moving to a QSEHRA or ICHRA is outside the notice’s shelter and owes the excise tax on Form 8928. The IRS can waive part or all of the tax if the failure was due to reasonable cause and not willful neglect, and if it was corrected within 30 days of the date the responsible person knew or should have known about it.¹² There is no checkbox for reasonable cause; you attach a written statement. Given the per-day, per-employee math, even a few months of continued non-compliance can produce a large bill.

Fixing Filings From the Relief Period

Employers that qualified for the transition relief were not required to file Form 8928 for the covered arrangements.¹ An employer that filed the form and paid the excise tax during a covered period may be able to claim a refund; the procedures depend on the year and the amounts, so this is a question for a tax professional.

Payroll corrections use two forms. To fix an employee’s wage record when premium reimbursements were reported incorrectly, issue Form W-2c. To adjust the employer’s payroll tax reporting, file Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return.¹³ Mailing addresses for Form 941-X vary by state and are listed in the form’s instructions.

1
Internal Revenue Service. IRS Notice 2015-17 – Small Employer and S Corporation Relief
2
Office of the Law Revision Counsel. 42 USC 300gg-11 – No Lifetime or Annual Limits
3
Office of the Law Revision Counsel. 26 USC 4980D – Failure to Meet Certain Group Health Plan Requirements
4
Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage
5
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
6
Internal Revenue Service. IRS Notice 2008-1
7
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
8
Internal Revenue Service. IRS Notice 2017-67
9
Office of the Law Revision Counsel. 26 USC 9831 – General Exceptions
10
HealthCare.gov. Health Reimbursement Arrangements (HRAs) for Small Employers
11
HealthCare.gov. Individual Coverage Health Reimbursement Arrangements (HRAs)
12
Internal Revenue Service. Instructions for Form 8928 (Rev. December 2025)
13
Internal Revenue Service. Instructions for Form 941-X (04/2026)