This six-part notice provides guidance on several ACA issues for employers; providing much-needed clarifications on some issues and notice of future proposed rules on others. Significant areas covered by Notice 2015-87 include:


-Additional HRA, Employer Payment Plan, Flex Credit and Opt-out clarifications


-Reporting Guidance for Fringe Benefits under McNamara-O’Hara Service Contract ACT (SCA), Davis Bacon & Related Acts (DBRA)


-Affordability Safe Harbor Indexed Amounts for 2015 & 2016


-Employer Shared Responsibility Penalty Indexed Amounts for 2015 & 2016


-“Hours of Service” Clarification for Employees on Disability


-2015 “Good Faith” ACA Reporting Penalty Relief


Cornucopia of Clarifications: HRA, Payment Plans, Flex-credits & Opt-Outs

This notice expands on previous guidance provided in Notice 2013-54 and 2015-17 regarding reimbursement plans. It also addresses Flex credits, Opt-outs and how these arrangements can affect affordability.


Health Reimbursement Arrangements (HRA) & Employer Payment Plans


-Reiterates that an HRA covering less than two current employees (retiree HRAs) can be used for individual market coverage premiums and does not need to be integrated with a group health plan


-Should an HRA covers current employees, then a former employee that is no longer covered by the group health plan will not be allowed to use remaining HRA funds to purchase individual market coverage


-Clarifies that HRAs used to reimburse medical expenses of an employee’s spouse or children cannot be integrated with employee self-only coverage. IRS is allowing a grace period and will delay enforcement of this requirement until 2017


-Employer Payment Plans via Section 125 cafeteria plans are not permitted to be used for the purchase of individual market coverage.


-This notice also clarifies that HRAs can be used to pay the premiums for excepted benefit coverage, such as dental or vision plans.


Flex-credits & Opt-Outs


-Employer provided flex-credits will only be considered as employer contribution toward employer-sponsored health coverage for determining affordability if the flex-credits can only be used for health benefits.


-If the flex-credits can also be used for non-health benefits (such as dependent care, life insurance), as well as health benefits, the flex-credits will be considered as employer contributions toward employer-sponsored health coverage for determining affordability for plan years beginning before January 1, 2017 if such  arrangements  were adopted on or before December 16, 2015.  It’s important to note that they will not be for determining the affordability of employer coverage for an employee when determining liability under the individual responsibility provision or eligibility for premium tax credits.


-The practice of employers offering an employee opt-out payments, which are only provided if an employee declines the employer offer of health coverage will be considered as an additional cost of coverage when determining the affordability. The IRS views this practice as an employee having to decline additional salary benefits if the employee accepts the employer-sponsored health coverage.


-Transitional relief is available and employers will not be required to increase the employee contributions when determining affordability and reporting for plan years beginning before January 1, 2017 based on opt-out arrangements established on or before December 16, 2015, It is important to note, employees are permitted to consider opt-out payments as increasing the cost of employer-sponsored coverage for the individual mandate or eligibility for premium tax credits.


Fringe Benefit under SCA and DBRA ACA Reporting

Under the new guidance, the IRS acknowledges that compliance with employer mandate provisions for employers with federal contracts who must comply with McNamara-O’Hara Service Contract Act (SCA) and the Davis-Bacon and Related Acts (DBRA) is difficult, because the employer is required to pay workers prevailing wages and fringes benefits and/or cash-in-lieu of benefits.


Due to the complexity of these issues, for the affordability and ACA reporting purposes; the IRS will permit employers to regard cash-in-lieu payments (must not be more than amount required under the SCA) as an employer contribution toward the employees (those covered under SCA) health coverage, in effect reducing the employee’s contribution toward health coverage and increasing the affordability. This will not have any impact on the employee cost of coverage under the individual mandate. HOWEVER, the IRS is asking that employers report without reducing the employee contribution amount; stating the employer will have an opportunity to address any IRS inquiries, if an employee received a premium tax credit in the marketplace and explain that they are eligible for relief as described in Notice 2015-87. Clients who decide not to use the fringe amount to reduce the employee contribution, should be aware that according to a CMS fact sheet released earlier this year; if an employee enrolls in Marketplace coverage and receives a premium tax credit, a 4980H penalty may be assessed prior to receiving a notification from the Marketplace. More details about the notice program can be found at:


The departments indicated they will continue to consider other methods for reporting the amount of the required contribution for employees subject to the SCA or DBRA, including the possible use of indicator codes in future years.


The following example was provided in Notice 2015-87:


Facts: Employer offers employees subject to the SCA or DBRA coverage under a group health plan through a section 125-cafeteria plan, which the employees may choose to accept or reject. Under the terms of the offer, an employee may elect to receive self-only coverage under the plan at no cost, or may alternatively decline coverage under the health plan and receive a taxable payment of $700 per month. For the employee, $700 per month does not exceed the amount required to satisfy the fringe benefit requirements under the SCA or DBRA.


Conclusion: Until the applicability date of any further guidance (and in any event for all plan years beginning before January 1, 2017), for purposes of 4980H(b) and Section 6056, the required employee contribution for the group health plan for an employee who is subject to the SCA or DBRA is $0. However, for purposes of affordability, that employee’s required contribution for the group health plan is $700 per month.


Adjusted Safe Harbor Affordability Threshold

Under prior guidance for plan years beginning in 2015, for the purpose of determining eligibility for a premium tax credit; employer sponsored health coverage is considered affordable if the employee portion of the annual premium for self-only coverage is 9.56% (increased from 9.5%) or less of his or her household income and goes up to 9.66% for plans beginning in 2016. However, under the previous guidance, the safe harbor affordability thresholds were not referenced.


Under the newly released guidance, the 9.5% safe harbor references will be adjusted to 9.56% for plan years beginning in 2015 and 9.66% for plan years beginning in 2016. Section 4980H regulations will be amended to reflect these changes and 2015 ACA reporting will require the use of the adjusted 9.56% safe harbor percentage.


Adjusted 4980H Penalty Amounts

Although the Department of Health and Human Services had previously released the formulas used to calculate the indexed cost of the 4980H penalties for the 2015 and 2016 employer shared responsibility mandate; the IRS had not published specific amounts for 2015 and 2016 adjusted for inflation.


Under the guidance in Notice 2015-87, the IRS released the adjusted amounts. For 2015, the annual penalty for employers not offering coverage is $2,080 (previously $2,000) and for 2016 the annual penalty for employers offering unaffordable coverage or coverage not providing minimum value (mv) is $3,120 (previously $3,000).  For 2016 these amounts will be $2,160 and $3,240, respectively.


Hours of Service

As background; under the Employer Shared Responsibility provisions “an hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence (as defined in 29 CFR 2530.200b–2(a)).”


-Notice 2015-87 clarifies that hours of service does not include the following:


-An hour that an employee is paid, during which no duties were performed, if the payment made is or due under a plan solely for the purpose to comply with workers’ compensation, unemployment, or disability insurance laws.


-An hour of service for a payment which reimburses an employee for medical or medically related expense incurred by the employee.


-The IRS also addressed the trend of educational institutions to use staffing firms to avoid break-in service rules and its intention to amend regulations to apply the 26-week rule to staffing firms who provide services to educational institutions.


Penalty Relief

This notice reiterates that the IRS will not impose penalties for incorrect or incomplete Forms 1094/1095 that report coverage offers in 2015. The relief will not apply if the ALE cannot show a good faith effort to comply with the reporting requirements or fail to file on time.


Yes…More Provisions

Notice 2015-87 also contained a number of miscellaneous items, including the treatment of TRICARE as an offer of coverage, FSA carry-overs with COBRA and examples of Flex-credit arrangements. Clients can view the notice at:


This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.