Temporary Penalty Suspension for Small Employers and S Corporations
New IRS Guidance on How to Revise Your Reimbursement Program
A popular tax-free benefit, long offered by small employers, is now subject to penalties under the Affordable Care Act. Some employers that do not offer medical plans have instead given a stipend to employees with “outside” individual insurance. So long as the stipend was paid directly to the “outside” insurer, or was no greater than the substantiated cost of the premiums, then the benefit was considered to be a “group health plan,” and was tax-free.
Unfortunately, the ACA has changed the landscape for these reimbursement programs. Precisely because they are considered group health plans, they are required to meet ACA requirements. Unhappily, the IRS has ruled that such reimbursements will always violate two specific ACA rules (the prohibitions against: dollar caps on benefits, and charging for preventive services).
The consequence of these ACA failures is harsh. The routine penalty is $100, per day, per employee receiving the reimbursement. That amounts to a $36,500 penalty annually, for each employee receiving the benefit, paid through an excise tax Form 8928. The penalties became effective in 2014. However, if the violation is unintentional, and due to “reasonable cause,” then the maximum penalty will be 10% of the employer’s total group health plan costs, during the preceding year, with a cap of $500,000.
Last month, more than a year after the penalties first became effective, the IRS issued a temporary penalty suspension for S Corporations reimbursing 2% shareholders, and also for small employers (under 50 employees). The S Corp moratorium will extend through year-end 2015. The suspension for small employers is until June 30, 2015. This IRS guidance, issued in February 2015 in Notice 2015-17, also introduced new rules on how all employers may bring their reimbursement programs into compliance with the ACA. These include:
- Offer the reimbursements only to a single employee or a single owner/employee
- Offer the reimbursements only to retirees
- Abandon the reimbursements entirely, and instead offer only insured coverage, or the ACA small-employer SHOP insurance plans
- Increase compensation to cover or partially cover the cost of the premium, but do not condition salary increase on enrolling in outside health coverage. The reimbursement will then be taxable to the employee.
- If the employer has fewer than 50 employees, offer the reimbursements only through June 30, 2015. No penalty will apply through this period for these small employers, and no excise tax filing is required.
- If the employer is an S corporation, offer the reimbursements only to 2% shareholders, and only through calendar 2015. No penalty will apply through this period for such employers, with respect to owner/employee coverage, and no excise tax filing is required. The penalties and tax filings will apply to reimbursements made to regular employees, during this period.
- If reimbursements cover only Medicare premiums, then they will be permanently exempt from the penalties, if they meet certain, prescribed requirements, including:
- the employer offering the reimbursements must also offer a medical plan for its active employees, for which all reimbursement-recipients are eligible
- the active-employee medical plan must provide “ minimum value,” as that term is defined by Internal Revenue Code §36B(c)(2)(C)(ii)
- The “minimum value” information can be supplied by the insurer. An online minimum value calculator is also available: http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/
How best to defend against the full impact of the excise tax? Employers filing the excise tax Form 8928 for their reimbursement programs should consider using the following explanations to minimize or even waive the penalty, if these explanations apply to them:
- they had no knowledge that their program violated the ACA
- their ACA violation was unintentional
- no reasonable diligence (use that precise phrase) could have disclosed that the reimbursement program violated the ACA because:
- this issue has received virtually no coverage in the press
- the IRS had announced that ACA employer rules were effectively delayed until 2015
- the reasonable cause (use that precise phrase) of the violation was the long absence of full IRS guidance
For employers with fewer than 50 employees and S Corps reimbursing 2% shareholders, it appears that no penalties will be imposed, and no excise tax filing is required, for all of 2014, and during the penalty-suspension period ending June 30, 2015 (for small employers) and December 31, 2015 (for S Corporations).