Even if you are a small employer who is not required to provide your employees with health insurance under the Affordable Care Act (ACA), if you reimburse your  employees for health insurance premiums, you run the risk of being hit with severe excise tax  penalties. These penalties can run up to $36,500 per year, per employee, based on the excise tax  penalty in place under the ACA of $100/day/impacted employee. It does not matter wheth- er you do this on a pre-tax or after-tax basis—both types of reim- bursements are subject to penalties.

These penalties are the result of the IRS (in Notice 2013-54) and the DOL (in Part XXII of its  FAQs, dated November 6, 2014) classifying reimbursement arrangements as “group health plans” 

that  must  comply  with  all  the  requirements  of  the  ACA. Because a premium reimbursement limits coverage to the amount of the premium—even if the premium  reimbursed is for coverage that is qualifying—it still falls short of meeting ACA requirements.

You can increase employee wages to make up for the lack of reimbursement, but you cannot require  employees to use the extra wages to get health insurance. Any wage increase is simply that—a wage  increase. Please be aware that this prohi- bition also  extends  to  reimbursement  arrangements   within S corporations where the corporation pays for an owner- employee’s coverage and then shows  the payment as a flow through item on its K-1.

Employers who are not required to offer  coverage  under  the ACA can: (1) choose to offer a  qualifying group health insur- ance plan; or (2) review the Small Business Health Options Program  via Healthcare.gov.

This excise tax penalty can be imposed for all of 2014. Howev- er,  given  the  fact  that  the   DOL’s  guidance  was  not  released until November 2014, many practitioners believe that the IRS will exercise leniency for 2014. Any reimbursements made in 2014 should be treated as taxable  income in 2014 to comply with IRS Notice 2013-54.

We recommend that companies carefully examine their actions regarding this issue and determine if  any violation has oc- curred. With excise taxes, there is a requirement to report fail- ures.  Mitigation provisions apply when there is self-reporting, including an overall cap on penalties.  There are, however, harsher penalties if there was a requirement to report that was not met. The  form for self-reporting is Form 8928. Given the complexity of the reporting and mitigation  requirements and the many new excise taxes under the ACA, we recommend con- sulting with tax  professionals to determine the appropriate treat- ment and reporting of transactions based on  specific facts and circumstances.