Small business owners know that some taxes are unavoidable. Taxes are the price we pay to live and work in this society. Yet other taxes are simply the result of sloppy management or failing to keep up with changes in the tax law. It is this latter category of small business taxes that is grabbing most of my attention recently. Why does it seem like so small businesses are not paying attention to managing their health plan tax liabilities this year? I suppose that as an expression of a personal belief, I am simply not comfortable with any small business paying more that than the legal minimum amount of tax. Yet many business owners and tax advisers who normally assume a similar strategy in their work seem seem to have missed this important tax change for 2015.
IRS warnings were ignored
The IRS issued a series of warnings from 2013 through at least August 2015 of its intention to step up enforcement of new small business penalty taxes added as part of the Affordable Care Act. These new excise taxes are triggered by a new section of the Internal Revenue Code know as section 9815 and assessed under section 4980D on non-compliant employee health plans for infractions that were perfectly legal before this year. The IRS went out of its way in to repeatedly emphasize the compliance problems and potential excise taxes triggered by paying or reimbursing employees’ individual insurance premiums or reimbursing medical expenses other than through an integrated HRA. Opponents of the law including the U.S. Chamber of Commerce and the AICPA tried but failed to have these severe taxes repealed or delayed.
Tax penalties are accruing daily
It is now clear that many small businesses are now racking up unnecessary tax bills that may be in the hundreds of dollars per day. By my conservative estimate, there are more than 50,000 small business owners throughout the United States, who owe an average of additional $19,200 federal excise tax for 2015 that are triggered solely by non-compliant health plan designs. Mechanical and procedural issues related to the calculation of the 2015 tax is covered in this separate blog post titled “Calculation of small business health plan excise taxes”
In every case, the tax could easily have been avoided with a few hours of tax and benefits planning. (It seems possible that some of these businesses will be able to mitigate this tax by taking action before the year-end but that is speculative and beyond the scope of this article).
Why are businesses ignoring the tax?
So why would a small business owner ignore an avoidable tax of this size? The most likely explanation is that they did not know about it. Despite all its resources, the IRS has limited capacity to “get the word out”. Most small business owners do not read daily blasts on social media from the IRS or hear stories about tax changes on headline news. Business publications like The Wall Street Journal, Forbes, and Kiplinger Tax Letter all included warnings to small businesses but these publications also have limited reach. Tax professionals likely knew about the change but many chose to not take action. Based on my own online and email conversations with other CPAs it seems that many have not warned clients about the severe new tax penalty that began accruing on effect July 1, 2015. They give a wide variety of reasons. Some CPAs expressed their position that since they did not “believe in” or support the Affordable Care Act they were not going to get involved in the issue. I responded in one professional forum that I’ve never before seen such a widespread response of disregard or deliberate non-compliance by tax professionals to a change in tax law.
Another possible explanation is that the businesses were given incorrect advice – either deliberately or unintentionally. The IRS says that it knows that one firm gave this bad advice knowingly. I surmise that it did so in an effort to “grab the spotlight” and boost its own sales. It also seems likely that many insurance agents sold non-compliant products or solutions known as “105 workaround plans” without knowledge that they plans are not effective in avoiding tax penalties.
Who is liable?
This raises the question of who is legally responsible for the taxes that could have been easily avoided by prompt action before the June 30, 2015 statutory deadline. Clearly some business owners will ask that question when they receive their extraordinary tax bill next spring. Are agents who sold non-compliant health products responsible? Are the tax advisers who failed to give advance warning also responsible? Should a business owner have a reasonable expectation of having been warned of the tax from their CPA or tax adviser? This is not a topic that I can address now but I certainly predict that it will be a hot topic among small business accountants for the foreseeable future.
How IRS will enforce penalty taxes
No one can predict exactly how this tax issue that affects so many small businesses will work out. IRS might be generous in allowing small businesses to take corrective actions even after the statutory deadline. We could presume that more tax advisers will get “on board” with providing advice on this issue once the word spreads that further relief from IRS or Congress is not coming this year. The IRS still says that it has plans to increase enforcement of ACA compliance in the small business market but we still have no details about what to expect. I speculated in another blog post that enforcement may tie into electronic matching of wage tax reports that are already in place including W2s and Form 1094-B and Form 1095-B from small business payroll service companies.
It seems likely that an omission of a health plan excise tax on the business tax return would trigger an additional penalty for substantial understatement of income tax for many small businesses. Section 6662 of the Internal Revenue Code imposes a 20% accuracy-related penalty on any underpayment of Federal income tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial understatement of income tax.
In the end, some small business firms will likely pay hefty penalties, some lighter penalties and some will get away with not paying anything for health plan vioations; this is the nature of our voluntary tax compliance system.
Solving the problem
It seems that the best way to approach problems with non-compliant health plans is to begin by estimating the dollar amount of tax risk exposure to small business health plan excise taxes. Once the scope of the financial risk is estimated the next step may be to review and amendment of the offending health plan document. Finally it is almost always necessary to modify the employer’s accounting practices. Accounting practice changes may be on a going-forward basis, retroactive, or both.
In cases where there is no health plan document or the documentation is out-of-date this issue should be addressed as a priority. While not all small business health plans require a separate plan document it would be inadvisable to continue this practice in a situation where a violation of ACA compliance may be involved.
Two of my other blog posts may be useful for the purpose of launching a health plan review:
For accountants and tax preparers: https://tonynovak.wordpress.com/2015/11/02/checklist-for-accountants-preparing-small-business-tax-returns-for-2015/, and
For small business owners: http://freedombenefits.org/Dos-and-Donts-for-small-business-health-plans.html