2015 brought dramatic changes to the way that small business health benefits are handled for wage and income tax reporting purposes. Harsh new penalties now apply to small businesses who may still be unaware of the new rules. Until recently many accountants believed that we would see relief provisions to these laws since so many small employers (possibly more than 100,000) and accountants are unprepared for the severe tax consequences this year. Yet members of Congress remain unsympathetic to our situation and CMS is unlikely to take action. At this point it seems clear that if any relief is possible, it will be penalty abatement after tax returns are filed showing the additional amounts due.
The tax rule changes for small business health plans create more work for tax preparers. The first issue that tax preparers face is recognizing the specific health plans that might trigger additional taxes or reporting requirements. This post is designed to list buzzwords and phrases that might raise awareness that a small business health plan might be affected by the new tax treatment.
The largest tax issues are triggered by employer payments or reimbursements for the cost of uninsured medical expenses outside of an integrated employer-sponsored group health insurance plan. These may be called Medical Expense Reimbursement Plans (MERP) or Health Reimbursement Arrangements (HRA). A compliant plan is usually administered by an insurance company. If an employer is paying these expenses directly, this is a pretty strong clue that the plan may not be in compliance. Employer payments for uninsured non-integrated health benefits must initially be reported on Form W2 and Form 1095B. Then later when the business tax return is filed than Form 2828 is added to the tax return to calculate the excise tax. Employers will be shocked to learn the size of these fines at $100 per employee per day.
Tax preparers should also be on the lookout for a second category oh health plans called “Section 105 plans” or “health expense allowance” plans that are disguises for arrangements where an employer pays for or reimburses the cost of individual health insurance. These also trigger the $100 per employee per day excise tax under IRC 4980D. The key here is to make a distinction between an employer-provided employee benefit plan (whether pre-tax or after tax makes no difference) and a payroll system payment accommodation for individual insurance. Any type of employer-sponsored employee benefit plan (such as described in section 105 of the Internal Revenue Code that incorporated individual health insurance is a problem under the ACA rules. In sharp contrast, an arrangement that is payroll payment accommodation is not a “group health plan” as defined by ACA and NOT an employee benefit plan is OK and does not trigger a penalty. The distinctions between an employee benefit plan and a payroll system accommodation are beyond the scope of this blog post but are covered in IRS Notice 2013-54 and 2015-17.
Finally, employer-paid contributions to a Health Savings Account (HSA) on behalf of an employee who was also a participant in a Flexible Spending Account (FSA) that included a carry-forward of benefits remaining from 2014 for either the employee or the employee’s spouse’s employer sponsored health plan. The HSA contribution is not allowed so the accounting error must be corrected, preferably before the W2 form is prepared.
Tax preparers who find these situations should be careful to document their work and communications. Always ask whether a plan document exists. Review it if possible or find a third party to review the plan. Consider that the size of the tax penalties is so large that it may trigger an Accuracy-Related Penalty Under IRC §§ 6662 in the large portion of small business tax returns. In almost all cases it makes sense for the business owner to address the underlying health plan problem in order to minimize tax penalties for the period past and prevent further future accrual of tax penalties.
Good point Tony. Thank you. BTW, one related comment… if tax practitioners are sort of (at this point) insensitive to this issue, gosh, think about the way most small business owners are thinking. Scary thoughts…
Tony, thank you for this article. Can you please confirm that the next to last sentence in paragraph 4 is correct – I thought the reverse would be true. Again, your points are excellent.
Thanks for that feedback Lauren. I concluded that the real issue was my weak choice of language in the original post so I rewrote that section for a higher degree of clarity: “Any type of employer-sponsored employee benefit plan (such as described in section 105 of the Internal Revenue Code that incorporated individual health insurance is a problem under the ACA rules. In sharp contrast, an arrangement that is payroll payment accommodation and NOT an employee benefit plan is OK and does not trigger a penalty. The distinctions between an employee benefit plan and a payroll system accommodation are beyond the scope of this blog post but are covered in IRS Notice 2013-54 and 2015-17.”. The main point for us to keep in mind that IRS and DOL have certain specific measures that cause a business practice to rise to the level of a regulated employee benefit plan under ERISA and ACA and other considerations, Stay below that threshold and avoid the laws altogether. I still don;t feel like it is possible to address the distinction in a blog post. I know that there are many examples of court cases where owners intended arrangements to be unregulated and the service or DOL prevailed as asserting applicable regulation. Recently IRS issued unpublished unfavorable guidance against the largest issuer of so-called “section 105 workaround solutions” indicating that the widely sold product in the small business market does not perform as advertised. Those who bought into it are likely still clueless. Also, there are plenty of court cases exactly the opposite. So, in any case, this is a complex topic that we should simply be aware of.
Thank you for the clarification, I follow your reasoning.
A little more on this topic: http://tonynovak.com/cpa/index.php/2015/12/27/more-on-section-105-plans/