There are three significant changes to federal income tax law this year that affect many small businesses. (While there were other 2015 tax law changes that affected small businesses most of the others were adjustments to inflation and those other changes cannot be impacted by the tax planning actions of small business employers). All three of these important tax law changes involve employer-provided health benefits for employees and all of these changes stem from the ongoing implementation of the 2010 law known as the Affordable Care Act. These changes must be recognized and addressed before preparing 2015 wage and income tax filings. The first potential filing deadline is the February 1, 2016 due date for sending W2 forms for employees. This year the value of some health benefits provided by small business employers must be reported on the Form W2. Not all small businesses are affected by the changes. The first challenge is determining which of the tax law changes, if any, apply to your business. The consequences of ignoring these changes could be catastrophic with tax penalties adding up to tens of thousands of dollars. Fortunately corrective action is available to employers who recognize the potential problems and take immediate action. Those changes affect businesses who have:
A) Paid for or reimbursed the cost of individual health insurance, either informally for an individually for an employee or through some type of employee benefit plan. Health insurance sellers may call these “Section 105 plans” or “health expense allowance” plans in an attempt to use this tax tool to boost insurance sales.
B) Paid for or reimbursed the cost of uninsured medical expenses outside of an integrated employer-sponsored group health insurance plan. These are often called Medical Expense Reimbursement Plans (MERP) or Health Reimbursement Arrangements (HRA).
C) Paid for contributions to a Health Savings Account (HSA) on behalf of an employee who was also a participant in a Flexible Spending Account (FSA) that included a carry-forward of benefits remaining from 2014 for either the employee or the employee’s spouse’s employer sponsored health plan.
Note that Section 105 plans, MERPs, HRAs, HSAs and FSAs are still valid and valuable benefit vehicles. It is just that beginning in 2015 they must meet additional reform requirements. Many and perhaps most of these health plans sold to small employers, in my own observation, do not meet the new IRS requirements.
It appears that the biggest potential obstacle to tax avoidance this year is that some small businesses have been advised that they do not have a tax problem relating to these issues. Firms selling insurance or compliance solutions have been identified by the IRS as promoting false information but the IRS does not have the capacity to stop tax fraud during the promotion stage before a tax return is actually filed. The message is “beware” if you purchased a solution marketed as a “section 105 plan” or a “Heath reimbursement account” or promoted under some other term synthesized to market a product or service. We expect that some unfortunate and unsuspecting purchasers of these plans will become enforcement targets of the IRS in 2016 and 2017 as part of the agency’s stated high priority effort o enforce small business compliance with the Affordable Care Act.
My firm Freedom Benefits offers a small business toolkit designed to help the business owner or tax preparer identify whether a tax issue exists in one of these three areas, focus on an intended resolution within the available range of options, and execute steps to address the problem. The toolkit focuses on undoing any employer action that may lead to a tax penalty and does not include the promotion of any insurance or integrated product. In essence, the toolkit helps a small employer convert an employee benefit plan with problems into a tax-compliant payroll practice that is not considered to be an employee health plan.
Because of the many possible combinations of problems and potential solutions, the best first step may be an initial consultation to determine whether a tax issue exists now. Consultations and toolkits will be available beginning Monday December 21 and are expected to remain available throughout this year’s tax filing season. Pricing and other details will be announced at that time.
Be aware that the strategies and options available to reduce or eliminate these tax penalties are diminished over time so it is best to act quickly for the best possible results from this tax planning effort.