Are You Really on Top of the Affordable Care Act Penalties?

The latest discussions around the looming and potential penalties employers face under the Affordable Care Act (ACA), more commonly known as Obamacare, are no longer just the "pay or play" penalties for employers who either do not offer insurance or offer inadequate or unaffordable insurance to their employees. Now there are other penalties that can make the "pay or play" penalties look insignificant. This is not to say the "pay or play" penalties are a thing of the past; they are still in place and businesses will start being exposed to them in 2015.

These looming penalties are associated with businesses who reimburse employees for individual health insurance, regardless of whether the reimbursement is done pre-tax or post-tax. The penalty for employers currently doing this is $36,500 per employee per year for employers large and small! That's a far cry from the $2,000 "no insurance penalty" or the $3,000 "unaffordability penalty" that only large employers thought they were facing for their employees starting in 2015.

Employer Payment Plan

Before understanding these penalties, let's first step back and understand how we got here. Revenue Ruling 61-146 along with Code Section 106 specifically laid the groundwork for employers to be able to pay individual insurance premiums directly to the individual's insurance company, or to reimburse the individual for those premiums upon proof of payment. These reimbursements were excluded from the employee's gross income under Code Section 106. This type of payment plan is referred to as an Employer Payment Plan (EPP).

The market reforms put in place under the ACA have two specific requirements that need to be mentioned. They prevent group health insurance from placing annual limits on certain benefits, and they require non-grandfathered plans to provide certain preventative care without cost-sharing requirements. Notice 2013-54 issued on September 13, 2013, detailed penalties for plans not abiding by the market reforms. It also specified that if employers were providing EPPs pre-tax, they are considered to be providing group coverage and will then fail the market reforms, as the amount of the individual coverage would be considered an annual limit, which under the market reforms is not allowed. However, it also stated that employers who were utilizing these EPPs and providing these payments post-tax were not part of this notice. Therefore, it was advised that employers start taxing these EPPs, rather than offering them pre-tax, in order to avoid the costly market reform rules.

FAQ Creates Confusion

Fast forward to November 6, 2014, when the Department of Labor, in conjunction with the IRS and Treasury, put out a short FAQ (frequently asked questions) which specifically stated that employers reimbursing employees for individual insurance premiums, whether that reimbursement is done pre-tax or post-tax, will be subject to the costly $100-per-day excise tax under Code Section 4980D, per person. Keep in mind these excise taxes are considered penalties, which are non-deductible when it comes to filing income tax returns. The date these excise taxes kicked in for this reimbursement was January 1, 2014.

The problem gets worse when it comes to 2 percent S corporation shareholders. These shareholders, who had individual health insurance plans, are required to have the company reimburse them for their premiums paid personally in order to take the self-employed health insurance deduction on the front page of their individual tax return per Notice 2008-1. The November 6 guidance, although only issued in an FAQ, states that by reimbursing these individual premiums, the S corporation will be subjecting itself to the $100-per-day penalty per shareholder who was reimbursed. Without this reimbursement from the S corporation, the shareholder loses a valuable deduction on page one of their individual tax return. However, it should be noted that the market reforms do not apply to plans with "less than two participants."

Options for Businesses

Obviously, the tax rules and the market reforms are in conflict with each other. For now, businesses need to weigh the potential benefits of pre-taxing or post-taxing individual coverage or subjecting themselves to a penalty of $36,500 per employee per year. The recommendation is to stop offering reimbursement of insurance premiums for individual coverage, regardless if that reimbursement is done pre-tax or post-tax. However, there is nothing to stop a business from giving employees bonuses for whatever dollar amount they choose. It's of the utmost importance, however, that businesses do NOT label this bonus as an insurance reimbursement, as this will then lead to the penalty. Businesses need to keep in mind the potential impact bonuses have on employee's overtime rates, as well as employee expectations should the post-tax bonuses get too costly for the business once they've started.

The rules surrounding the Affordable Care Act are continually changing. It's essential that businesses, large and small, keep up with these changes to make sure they do not inadvertently get caught on the wrong side of the penalties. If you have any questions surrounding health care reform, insurance costs and the Marketplace, contact an Eide Bailly professional or visit our website to learn more.