INCOMPLETE/UNEDITED – This post consists of notes and a rough draft of an article to be published in early 2016 at the beginning of tax filing season. The article covers the tax liabilities and tax reporting requirements of small businesses that provide employee health benefits in 2015. The requirements for a small business fall into to categories: 1) additional reporting requirements and penalties for failure to do so, and 2) excise taxes triggered by specific health plan transactions.
The two primary methods used by small businesses to provide employee health benefits are through employer-sponsored group health insurance and a range of supplemental health plans. The most common and typically the most efficient supplemental plan prior to implementation of the Affordable Care Act (ACA) was a Health Reimbursement Arrangement (HRA). Other less common methods are Health Savings Accounts (HSA), Flexible Spending Accounts (FSA) and excepted insurance. The ACA adds new tax reporting requirements and several levels of potential tax liabilities for employers who provide employee health benefits. For most companies, the new requirements take effect in 2016 for health benefits provided in 2015. This article covers the tax impact on employers with more than one participating employee and less than 50 employees. Additional guidance from IRS is expected before the due date for 2015 tax returns.
Additional filing requirements and penalties
Small businesses that sponsor a Health Reimbursement Arrangement (HRA) or other non-insured reimbursement plan are required, for the first time, to provide employees with Form 1095-B by January 31, 2016 and to report these benefits to IRS on Form 1094-B by February 28, 2016 (March 30, 2016 for electronic filers). Employers that pay medical expenses on behalf of an employee must also issue a 1099-MISC to the medical service provider by February 28, 2016 if the amount is more than $600.
Some small businesses are exempt from additional reporting requirements under ACA if they:
- do not provide employee health benefits or reimburse employee health costs
- provide only employer-provided group health insurance (reporting requirements will be met by the health insurance provider).
- provide excepted benefits like limited benefit indemnity health insurance
Presumably these reporting requirements would typically be met through payroll service providers. It is not clear whether providers are ready to handle this task especially in the most common scenario when the triggering coverage is not provided through the payroll service. The penalty for failure to file these information return is normally $250 per employee. Penalties for failure to file 1099-MISC vary but are most typically $30 to $100 per form.
The Affordable Care act adds a new excise tax payable for employers who provide some types of employee health benefits. The amount of the excise tax triggered under Internal Revenue Code Section 4980D is $100 per employee per day. Assuming the Service sticks to the enforcement date of July 1, 2015 and the offending health plan is in force for the entire tax period then the excise tax adds up to $18,250 per employee. There may be opportunities to reduce this tax but that discussion is omitted from this article because of a lack of authoritative guidance at this time.
Common situations that trigger the excise tax include paying for or reimbursing the cost of:
- individual health insurance
- health insurance provided through an employee’s spouse
- out-of-pocket expenses for an employee who is not covered by your group health insurance plan
- health benefits provided through a Section 125 cafeteria benefits plan
IRS makes it clear that it does not matter whether the payment or reimbursement was made on a pre-tax or after-tax basis, the excise tax is still payable. Bonus plans that are not tied to or conditioned upon health insurance but are used by the employee to pay for insurance do not trigger the excise tax.
Is it even worth providing health benefits?
Small business owners may question whether the new reporting requirements, liability risks and additional employer taxes make if smart to avoid providing health benefits altogether. No doubt some in the “designed to fail” camp continue to believe that this was an intended result of the Affordable Care Act.
Clearly a small business’ simplest and safest response to the Affordable Care Act is to not provide any employee health benefits but rather to focus on other taxable and tax-qualified forms of compensation. In the current legal environment an advisor should weigh the benefits of advising clients to steer clear of this tax minefield.
Another option is to provide only excepted insurance. Limited benefit health insurance does not trigger any tax reporting or excise tax. This is true regardless of whether the insurance is individual or group coverage.
Will we see change prior to 2015 tax filing deadlines?
Some cite the unreasonable burden of these current law as an indication that change must occur prior to 2015 tax filing deadlines. On July 2, 105 Kiplinger wrote “if the Service does not grant relief, it’s a safe bet that taxwriters will do so”. Other sources are not as persuasive on the possibility of near-term reform. Proposed corrective legislation On August 7, 2015 IRS issued the last relevant guidance on this topic prior to this article submission and we could argue that the latest guidance is even more burdensome than prior drafts of the same material.
Watchlist for advisors
Advisors may wish to be on the lookout for these common small business health plan problems that can trigger additional taxes and penalties:
- “Notice of Health Benefits” not provided to employees
- No written health plan documents
- Employer presumes that their insurance company handles compliance requirements without evidence
- Reimbursing employee health expenses outside of a qualified employer plan
- Paying for or reimbursing the cost of insurance offered through Healthcare.gov
- Stand-alone HRAs
- Section 125 cafeteria plans that include health benefits
Considering the potential cost and the IRS threat to make this a high priority focus for compliance and enforcement, the advisor may wish to document that they discussed the potential tax implications with their small business client.
References and additional reading
Tax planning for small business excise tax penalties under IRC 4980D