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 whether you do this on a pre-tax or after-tax basis—both types of reimbursements 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 prohibition 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 insurance plan; or (2) review the Small Business Health Options Program via Healthcare.gov.
This excise tax penalty can be imposed for all of 2014. However, 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 occurred. With excise taxes, there is a requirement to report failures. Mitigation provisions apply when there is self-reporting, including an overall cap on penalties. However, there are 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 consulting with tax professionals to determine the appropriate treatment and reporting of transactions based on specific facts and circumstances.