Excise Tax Goes Into Effect for Small Employers on June 30, 2015
It was common practice for small churches and nonprofits to allow their employees to purchase insurance on their own, then seek reimbursement for the cost of the premiums from the church or nonprofit. This arrangement had been considered a non-taxable fringe benefit for many years and was a favorable arrangement for all the parties involved. However, under the Affordable Care Act (“ACA,” aka Obamacare) this arrangement exposes employers to significant penalties if not ceased.
Most employers are familiar with the Employer Shared Responsibility mandate, which requires large employers with 50 or more full time equivalent employees to provide health coverage to all of their full time employees. While this employer mandate has garnered considerable attention in the media and among business owners, the 4980D excise tax has received very little attention—to the detriment of many business owners.
The section 4980D excise tax (named for the section in the U.S. Code where it is found) applies to any employer, regardless of the number of employees, which sponsors a group health plan that fails to satisfy ACA coverage requirements—requirements such as the prohibition against annual dollar limits and the prohibition against cost-sharing for preventive services.
Most employers understand that whatever health plan they offer to employees must satisfy ACA mandates. But what is not so clear to many employers is that “group health plan” is a broad concept that encompasses many employer payment arrangements not typically considered a “health plan.” These plans include:
(1) Health reimbursement arrangements (HRAs)
(2) Health flexible spending arrangements (Health FSAs)
(3) Employer payment plans in which the employer reimburses the employee for premiums for non-employer sponsored medical insurance.
Each of these arrangements is considered “group health plans” for purposes of the ACA and the Employee Retirement Income Security Act (ERISA). If the plan fails to comply with the ACA, employers will be subject to an excise tax of $100 per day per employee ($36,500 per year, per employee). Each of the three plans mentioned above fail to comply with the ACA because they necessarily include annual limits.
The 4980D excise tax went into effect January 1, 2014. However, the IRS granted a temporary reprieve from the excise tax in limited circumstances, and will not impose the excise tax on small employers until June 30, 2015. After that date, however, these employers will be subject to the 4980D tax.
IRS Notices 2013-54 and 2015-17 provide additional explanation on which arrangements are subject to the excise tax and which are not. Contact Simms Showers LLP today to find out how you can become compliant with ACA requirements and avoid hefty tax penalties.
Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Elyse Smith at ems@simmsshowerslaw.com for legal advice that will meet your specific needs.
