How to avoid tax penalties on Health Reimbursement Arrangements

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How to avoid tax penalties on Health Reimbursement Arrangements
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How to avoid tax penalties for Health Reimbursement Arrangements (HRAs)

New 2014 tax penalties under Section 4980D apply to many types of common employer payments for employee health care

by Tony Novak, CPA, MBA, MT
originally published: 11/24/2014, revised:

The Affordable Care Act added a number of penalties for non-compliant employer health plans. The most severe of these are excise taxes like those under Internal revenue Code Section 4980D for health reimbursement arrangements. The penalties for employers who make non-compliant reimbursement payments are $100 per employee per day, plus interest for the entire period of non-compliance. A lesser penalty of 10% of the employer’s payment may apply to unintentional violations committed by small business employers. An article titled “10 Things Small Businesses Must Know About Health Reimbursement Arrangements” provides more information on this topic. This article is meant to illustrate some common types of allowable and unallowable reimbursements and what can be done to correct the unallowable arrangements.

For simplicity, this article ignores the possibility of grandfathered health insurance plans and self-insured health plans. The term “employee” in this article refers to a common law employee except where specifically stated to be an owner/employee.

Allowed: The sole owner/employee of C corporation reimburses the cost of his health insurance and out-of-pocket expenses. The same is true if the plan covers a spouse or child employee who is overed inder the same health insurance plan.

Not allowed:

Not allowed: Employer pays

Employer reimburses cost of individual employee

Related topics:

26 U.S.C. 4980D Failure to meet certain group health plan requirements

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