by Tony Novak, CPA, MBA, MT revised 1/29/2016
Editing note: the latest version of the article is relocated to my new web site and actually contains 20 points. The title of the article here was left unchanged.
If your small business reimburses employee health care costs then you may need to be aware that the tax laws for these reimbursements changed dramatically in 2015. Changes may be actions necessary right now to avoid severe tax liabilities as a result of the Affordable Care Act (ACA).
This expanded list of 20 items may help small business employers and tax advisers gain a better understanding of the (mostly) new tax rules. A few of the older HRA rules are included in the list for emphasis.
1. The federal government considers your reimbursement arrangement to be subject to the extensive legal requirements of a "group health plan" even if you did not intend it so or think of it that way. The legal requirements include employer exposure to the requirements of the Employee Retirement Income Security Act of 1974 for employee welfare benefit plans.
2. To avoid taxes and legal liabilities begnning July 1, 2015, the HRA must be integrated with an employer-provided ACA-compliant group health insurance plan.
3. Employers should not reimburse the cost of individual health insurance under any circumstances.*
4. Where an employee is covered by their spouse's plan, employers should not reimburse the cost of the spousal coverage.
5. The HRA should not cover employees who are not enrolled in the employer's group health insurance, nor and spouses or dependents who are nt covered by that insurance.
6. For purposes of deterring whether a violation of ACA market reforms has occurred, it does not matter whether the reimbursements were made on a pre-tax or after tax basis.
7. Taxation of health benefits to the employee is a completely separate issue from the applicability of excise taxes on the employer.
8. Employers who give taxable compensation bonuses should not make reference to any aspect of employee health care costs in the bonus arrangement.
9. The minimum statutory tax penalty for unintentional violation of ACA market reform law is 10% of the amount the employer paid. The maximum amount of penalty is $100 per employee per day of violation, plus (if applicable) wage taxes plus (if applicable) interest and penalties.
10. Stand-alone HRAs are prohibited regardless of whether they are simply an informal arrangement or documented employee benefit plans.
11. An integrated HRA must be in writing; distinct from the insurance policy.
12. The HRA benefits muct be communicated to employees separately from the insurance plan.
13. Employees may not contribute to a HRA on a voluntary salary-deducted basis.
14. Employees who waive health insurance or have other non-employer provided insurance (i.e. covered under spouse's insurance or individual plan) cannot participate in the HRA.
15. HRAs are effective in expanding coverage at a higher overall cost. HRAs are not effective in reducing the overall cost of employee health benefits. In fact HRAs may someday trigger the "Cadillac tax" provisions for rich health benefits in the future because they increase the total health benefits for employees.
16. Improper reimbursements trigger severe excise penalties under section 4980D of the Internal Revenue Code. This penalty is $100/day excise tax per applicable employee (which is $36,500 per year, per employee). Smaller penalties may apply in 2014 if the violation was not due to willful neglect. The penalties must be self-reported beginning in 2014 yet many employers may not even realize that they are in violation so the likelihood of interest and late payment penalties further compounds the problem.
17. If the employer is subject to the smaller 10% excise penalty for 2015 and then still does not correct the HRA plan for 2016, there would likely be a greater likelihood that the higher severe penalty would be assessed for the same repeat violation in the second year.
18. Employers that had a medical reimbursement plan prior to July 1, 2015 and have not updated their plan this year may unknowingly be subject to the excise tax. Apparently there are many small firms that don't even know about this problem).
19. Employers affected the excise taxes in #16 above should act as quickly as possible to terminate or amend their HRA plan and make appropriate payroll tax adjustments if necessary to avoid additional lateness tax penalties.
20. Excise tax penalties are self-reported on IRS Form 8928. The first small business penalty taxes are payable March 16, 2016 by corporate and partnership filers on violations occurring from July to December 2015.
Disclosure and clarification
The advice in this article is simplified for the purpose of clear communication regarding most small businesses. As with most aspects of tax and benefit law, there are special circumstances that may change this information. This article ignores the possibility of uninsured ACA-compliant health plans or grandfathered health plans simply because these are not common.
*Many of these points do not apply to one person health plans.
The term "health insurance" in this discussion refers to primary ACA-compliant major medical insurance also known as "minimal essential coverage".
IRS Notice 2013-54 http://www.irs.gov/pub/irs-drop/n-13-54.pdf
IRS Notice 2015-87 https://www.irs.gov/pub/irs-drop/n-15-87.pdf
IRS Notice 2016-4 https://www.irs.gov/pub/irs-drop/n-16-04.pdf
Application of Affordable Care Act Provisions to Certain Healthcare Arrangements https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf
US Department of Labor, FAQs about Affordable Care Act Implementation (Part XXII) http://www.dol.gov/ebsa/faqs/faq-aca22.html
"Why ACA Employer Mandate Rules Need More Guidance" by Alden Bianchi in Employee Benefit News, 12/25/2014.
TD 9705: Minimum Essential Coverage and Other Rules Regarding the Shared Responsibility Payment for Individuals, 11/26/2014 (How employer contributions to HRAs affect calculation of affordability and exemption from individual mandate penalty) https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-27998.pdf
Year-End Tax Moves for Small Businesses - Wall Street Journal 11/21/2014
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Opinions expressed are the solely those of the author and do not represent the position of any other person, company or entity mentioned in the article. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Tony Novak operates as an independent adviser under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator" but is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.