Most employers are by now well aware of the “pay or play” penalties that may apply if the employer fails to offer coverage to substantially all of its full-time employees or offers coverage that fails to be affordable for some employees. The imposition of those potential penalties was delayed until 2015 and significantly moderated for that first year of applicability. However, another potential excise tax penalty for failure to comply with a variety of healthcare reform requirements applies under Section 4980D of the Internal Revenue Code (the “Code”) and went into effect in 2010.
The 4980D excise tax equals $100 per day per “affected individual” to whom a compliance failure relates. In other words, the tax could be as much as $36,500 per person per year, as compared to the maximum $2,000 or $3,000 per person per year penalty for the failure to offer coverage or the offer of unaffordable coverage, respectively. In addition, the penalty is triggered by a long list of healthcare reform and related legislative requirements, including not imposing any annual or lifetime limits on essential health benefits, covering preventive services at 100 percent, providing the Summary of Benefits and Coverage to covered persons, meeting health status nondiscrimination and claim appeal external review requirements, and complying with the requirements of the Newborns’ and Mothers’ Health Protection Act, the Mental Health Parity and Addiction Equity Act, the Women’s Health and Cancer Rights Act, Michelle’s Law, and the notice requirements regarding Medicaid coverage under the Children’s Health Insurance Program Reauthorization Act (“CHIPRA”).
In short, any of a number of compliance failures could trigger the 4980D excise tax penalty. Employers sponsoring group health plans are generally the ones liable for the tax, if it applies, and must file and self-assess the tax using IRS Form 8928. There is a cap on the amount of tax for unintentional failures of $500,000, but the cap applies only if the failure was due to “reasonable cause and not to willful neglect.” While this standard has not yet been defined for this purpose, in other situations where a similar standard applies under the Code, it is a high hurdle. Being unaware of what is required is not “reasonable cause,” and thus the full penalty may apply unless the reason for the failure is largely beyond the control of the employer. A careful review of your plan’s compliance with the many requirements that can trigger this tax is recommended.