4980D Small Business Excise Tax Liability

This is the original submitted version of the article published by New Jersey CPA magazine under the same title in the January 2016 edition. The published version was slightly shortened to meet space requirements in the print publication.

Background

The Affordable Care Act adds Section 9815 to the Internal Revenue Code that requires employer-provided health plans to comply with a number of market reform provisions. IRS Notice 2013-54 explained that some of the most popular health benefit arrangements used by small businesses violate market reform provisions. The most common examples of non-compliance are an employer’s payment for individual health insurance or payment of health benefits that are not integrated with an employer-sponsored group health insurance plan.

Employer-paid health benefits for common law employees must now be: a) integrated with a qualified employer-sponsored group health insurance policy, b) benefits excepted by law, or c) subject to an excise tax penalty. There are exceptions for one person businesses, S-corporation shareholder employees, church plans, and union plans that are not covered in this article. The excise tax penalty for small business employers took effect on January 1, 2015. IRS Notice 2015-17 delayed enforcement of the excise penalty during a correction period that extended until June 30, 2015. Efforts by some members of Congress and the AICPA to repeal implementation of this potentially harsh penalty will not likely be granted for 2015, according to most sources at the time this article was submitted.

New Reporting Requirements

Excise taxes payable by a small business employer under IRC 4890D are self-reported on Form 8928, Part 2, that must be filed by the due date of the 2015 return, including extension.

There are two types of excise tax penalties: Section A – Failures Due to Reasonable Cause and Not to Willful Neglect and Section B – Failures Due to Willful Neglect or Otherwise Not Due to Reasonable Cause. The Section A penalty is a manageable 10% of the total amount paid for employee health benefits for affected employees. The Section B penalty is a potentially much greater $100 per employee per day excise tax.

This article does not address the determination of which excise tax penalty applies. We presume that for 2015 some affected employers will take the position that the failure was not discovered despite exercising reasonable diligence or was corrected within the correction period and was due to reasonable cause. If so, then the Section A penalty would apply for 2015. Little other guidance is available at this time.

How to recognize a penalty situation

Employers and their tax preparers should look for and address arrangements that may trigger an excise tax. Tax preparers should be on the lookout for these common warning signs that may indicate exposure to 4890D excise tax liability:

1. Lack of health plan documents or document that have not been updated since before implementation of the Affordable Care Act.
2. Commercially marketed “workaround” arrangements that use wording like “Section 105 plan”.
3. Employer payments for individual health insurance premiums.
4. Employer payments for health care expenses that are not administered together with the group health insurance policy.

Penalty relief

The IRS issued relief from this penalty to small business employers with non-compliant health plans for the first six months of the year (IRS Notice 2015-17), so the Section 4980D penalty would apply to health benefits beginning July 1 2015 through December 31, 2015. This means, for example, that if an employer made a payment to a single employee for health benefits of $300 per month for all of 2015 then the tax under Section A would only be $180 (10% of $300 x 6 months) but the tax under Section B would be $18,400 ($100 per day for 184 days). Without further guidance from the Service, it appears that in the most common types of small business health plan violation scenarios a strong statutory argument could be made for the more severe Section B penalty.

The Service has the statutory authority to grant penalty relief in this matter. Given the severity of the Section B penalty and its potential to even bankrupt some small employers, we presume that the Service may liberally concede to accept a Section A penalty from affected small business employers for 2015. However, once an employer claims an unintentional violation for 2015 and assumes the lower Section A penalty, it would appear to be unlikely that the employer could continue to claim that the very same violation was unintentional again on the 2016 tax return. For this reason, it may be urgent to correct the non-compliant provisions in the underlying health benefit plans that are triggering the excise tax as early as possible and certainly (hopefully) before the 2015 tax return filing date in early 2016.