by John Bolyard, CPA
Tax Senior at Atchley & Associates, LLP
Many small business owners may not be aware that effective June 30, 2015, small businesses, defined as having 50 or fewer full-time equivalent employees (FTEs), can face severe penalties for continuing to have stand-alone health reimbursement arrangements (HRA) or Employer Payment Plans (EPP). The penalty for having these types of plans in place after June 30th can be up to $100 per day, per employee. That calculates to a penalty of $36,500 per year, per employee! Although, under the Affordable Care Act (ACA), small businesses are not required to offer group health plans to their employees, if they do offer health plans, they must be compliant with the ACAs market reforms. I will briefly describe these types of plans and conclude with some suggestions as to what can be done if your business currently has one of these plans in place.
Stand-Alone HRAs have been used by small businesses for decades because they have been both tax deductible to the employer and are not included in the employee’s gross income. It is labeled “Stand-Alone” to distinguish it from other HRAs which are accompanied by qualified group plans. The HRA is funded entirely by the employer and not through employee salary deductions. The funds can be used to reimburse employees for qualifying medical expenses such as out-of-pocket medical costs or for individual medical insurance premiums. The employer has more control over the cost because they can determine the amount to fund the HRA. Because there is a cap on the amount which can be paid, it is regarded as being out of compliance with the ACA market reforms and is subject to the punitive tax.
EPPs are another alternative which small business owners have commonly used in the past. Under an EPP, the employer will reimburse the employee for the amount they paid for insurance premiums. Similar to the HRA, the payments would be tax deductible to the employer and excluded from gross income for the employee. Because the reimbursement amount is limited to a specific sum determined by the employer, it is also considered to not be ACA compliant.
An exception to the excise fees imposed for these two plans exists when the plan has fewer than two participants who are current employees on the first day of the year (IRS Notice 2015-17). This also applies to more than 2% owners of S Corporations as long as there is only one current employee enrolled in the plan. Furthermore, as is commonly the case, if both a husband and wife are owners of the S Corporation, the plan is considered to cover only one employee even if they are being reimbursed for a medical plan that covers the entire family. So if you are a small business owner and you are the only one covered in your plan, then you would not face the $100 per day penalty.
For small business owners that do have a stand-alone HRA or an EPP as described above which covers two or more employees, then there are some options to consider. Form 8929 allows for the reporting of the excise tax and the amount which attributable to a reasonable cause. To qualify for a reasonable cause exception, the non compliant plan should be terminated within 30 days of the date you became aware that it was in violation of the ACA. In the event that you are audited by the IRS, it is strongly recommended that documentation be maintained to substantiate the date which you learned that the plan was not allowed.
Once action has been taken to terminate the plan, then there are three other important decisions to make. The small business can replace the plan with one that is ACA compliant, discontinue offering any health plan at all, or discontinue offering a health plan and increase employee’s wages. If you decide to increase the employees’ wages, then it is important that restrictions not be placed on how the employee spends the money (i.e. the employee cannot be required to use the money to buy health insurance).
If you would like to do further reading on this topic, I have listed some helpful links below to the IRS and US Department of Labor websites which address this subject.
If you have questions or concerns that the type of plan you have is one of those described above, please feel free to give us a call to discuss. While we are not ACA compliance experts, we do have a strong network of insurance specialists and we would be more than happy to direct you to someone who can answer your specific insurance questions. Also, if you have other tax or business questions please feel free to reach out to us. It is our privilege to be your trusted advisors.