Are you willing to pay huge penalties for reimbursing your employees for their health insurance?
By Kristina Morgan and James Raftery
Did you know your business could be subject to penalties of up to $36,500 a year ($100 per day) per employee simply for reimbursing your employees pre-tax for premiums paid by them for health insurance? You could be subject to this large punitive penalty if you have a business with more than one employee, including yourself.
Background of ACA Compliance
The ACA includes an individual health insurance mandate which applies to the self-employed as well as everybody else. This is true whether you’re a self-employed sole proprietor, partner in a partnership or limited liability company, or employee of your own small corporation.
Additional penalties for compliance failure by the employer were made clear early on (up to $3,000 per employee per year), called the “pay or play” rule. Many larger businesses viewed the penalty as a cheaper alternative to complying with the individual health insurance mandate, and so decided to cancel their plan and reimburse the employees who obtain insurance either directly or through the Marketplace.
The Danger You Face
Due to employee levels, most smaller businesses are not affected by “pay or play” and, therefore, felt they had no obligation to comply with the ACA regulations. However, there is a much more significant trigger that has gone virtually unnoticed by both large and small companies: Pre-tax reimbursement is disallowed.
Internal Revenue Code, section 4980D generally assesses an excise tax for reimbursements:
$100 per day per individual per violation ($36,500 per year per one missed requirement).
A minimum of $2,500 per individual affected by a violation where (1) the plan does not correct the compliance failure(s) before the IRS sends a notice of examination of tax liability, and (2) the failures continue during the examination period.
A minimum of $15,000 per individual if the compliance failure is more than de minimus (when the value and the frequency is so small as to make accounting for it unreasonable or impractical).
Certain failures can trigger this excise tax. Since insurance companies no longer offer insurance that doesn’t meet the ACA standard of minimal essential coverage, most business owners believed they were in compliance without knowing about the pre-tax reimbursement prohibition. That is enough to trigger the excise tax.
The excise tax applies to any employer – regardless of its size. We’ve already said not many people know about this excise tax but as an employer, you’re on the hook to prove you didn’t know. Even if you can prove the mistake was accidental, the employer must still correct failure(s) within 30 days of the violation AND the correction(s) must be retroactive to the fullest extent possible to potentially avoid some or all of the excise tax.
Are you prepared?
These penalties were set to take effect on January 1, 2014, but the IRS decided to delay enforcement until 2015, so now more than ever, it’s important to review your plan. We continue to be aware of these demands, especially as they impact your business and your tax liability. If you don’t know for sure, we can review your business to help you avoid non-compliance.
Online: Health care reform - consequences of noncompliance for group health plans, February 28, 2014 (FYI In-Depth, Vol 37, Issue 23, www.buckconsultants.com, accessed Feb 2015) 26 U.S. Code § 4980B - Failure to satisfy continuation coverage requirements of group health plans (Legal Information Institute, www.law.cornell.edu, accessed Jan 2015) Transition Relief for 2014 Under §§ 6055 (IRS Publication, www.irs.gov, accessed Jan 2015 The Forgotten Penalty: Health Care Reform Excise Taxes Could Devastate Employers (Hinkle Law Firm, www.hinklaw.com, accessed Dec 2014) Health care compliance Form 8928 excise tax self-reporting requirements..., Ann Caresani, Febuary 8, 2012 (Employee Benefits Law Reports, www.employeebenefitslawreport.com, accessed Jan 2015)
Publications: 2014-2015 Schedule C/F & General Business Federal Tax Update, p. 5-60 to 5-66 (Vern Hoven Publications) If you have any questions about this topic or any others relating to your finances, give us a call or email. We'll be happy to assist you.