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(Including the new ACA requirements for 2014)
If your small business reimburses employee health care costs in any manner, you need to be aware that the law has changed and there may be actions necessary right now to avoid severe tax and legal liabilities.
This expanded list of 18 items may help small business employers and tax advisers gain a better understanding of the new excise tax rules.
1. The federal government considers your 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 exposure under the Employee Retirement Income Security Act of 1974 for employee welfare benefit plans.
2. To avoid taxes and legal liabilities, 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 never reimburse the cost of the spousal coverage.
5. For purposes of deterring whether a violation has occurred, it does not matter whether the reimbursements were made on a pre-tax or after tax basis.
6. Taxation of health benefits to the employee is a completely separate issue from the applicability of excise taxes to the employer.
7. Employer who give taxable compensation bonuses should not make reference to any aspect of employee health care costs.
8. The minimum statutory tax penalty for unintentional violation 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.
9. Stand-alone HRAs are prohibited regardless of whether they are simply an informal arrangement or documented employee benefit plans.
10. An integrated HRA must meet additional requirements including the requirement that they be in writing and be communicated to employees separately from the insurance plan in order to make the benefits a tax-free to the employees.
11. Employees may not contribute to a HRA on a voluntary salary-deducted basis.
12. Employees who waive health insurance or have other non-employer provided insurance cannot participate in the HRA.
13. HRAs are not a tool to reduce the cost of employee health benefits. In fact HRAs may trigger the “Cadillac tax” provisions for rich health benefits in the future because they increase the total health benefits for employees.
14. 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.
15. If the employer is subject to the smaller 10% excise penalty for 2014 and then still does not correct the HRA plan for 2015, there would likely be a greater likelihood that the higher severe penalty would be assessed for the same repeat violation in the second year.
16. Employers that had a medical reimbursement plan prior to 2014 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).
17. Employers affected by #14 above should act as quickly as possible to terminate or amend plans and make appropriate payroll tax adjustments if necessary to avoid additional lateness tax penalties.
18. Excise tax penalties are self-reported on IRS Form 8928 which has not yet been updated for 2014 to include provisions for HRAs.
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. *Also, many of these points do not apply to one person C corporations. The term “health insurance” in this discussion refers to primary ACA-compliant major medical insurance.
IRS Notice 2013-54 http://www.irs.gov/pub/irs-drop/n-13-54.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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