Health Care Reform, HRAs & HSAs, Insurance Market Reforms, Penalties, Small Employers, Taxes, Fees & Penalties

New IRS Q&As Reiterate Penalties on “Employer Payment Plans”

On March 4, 2016, the IRS updated its webpage on “Employer Healthcare Arrangements” to remind employers of the potential penalty on employers who do not establish health insurance plans for their own employees, but reimburse those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace).

The IRS webpage references IRS Notices 2013-54 and 2015-17 and DOL Technical Release 2013-03.  For prior Leavitt articles on this prior governmental guidance, click here, here and here.

Why is the IRS Again Reiterating Potential Penalties on Premium Reimbursement Plans?

One possible conclusion one might draw from the IRS Q&As is that the IRS does intend to impose penalties on employers who ignored prior IRS guidance (issued since September 2013) and continued to reimburse employees for premiums for individual health insurance. For example, small employers who continued such arrangements after June 30, 2015.

Keep in mind that employers who sponsor benefits arrangements that fail to satisfy the market reforms (specified below) or fail to comply with other Code requirements are required to file IRS Form 8928, to “self-report” their failure to comply, as well as to calculate and pay the excise tax due. Failure to file Form 8928 or to pay the taxes due results in interest and penalties.   See additional information below on Form 8928 filing requirements.

Another possible conclusion is that the IRS is reminding employers about these potential penalties because it has heard about new arrangements some vendors are offering that purport to be different from the arrangements the IRS has described in the prior Notices and other guidance, and the IRS doesn’t want employers who are currently in compliance to inadvertently fall out of compliance.

Main Points in the IRS March 4th Q&As:

  • Employer premium payment plans are considered to be group health plans subject to the ACA market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. (These are at PHS Act §§ 2711 and 2713, respectively.) Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms.
  • Arrangements that fail to satisfy the market reforms may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under § 4980D of the Internal Revenue Code.
  • Notice 2015-17 provides transition relief from the § 4980D excise tax only if the employer payment plan is: 1) sponsored by an employer that is not an Applicable Large Employer (ALE) – defined as one with less than 50 full-time employees and full-time equivalent employees in the prior year; or 2) an S corporation healthcare arrangement for 2-percent shareholder-employees; or 3) a Medicare premium reimbursement arrangement; or 4) a TRICARE-related health reimbursement arrangement (HRA).
  • Small employers with employer payment plans are not subject to the §4980D excise tax for 2014 and up to July 1, 2015.
  • Sub-S corporations with 2%-shareholder employee healthcare arrangements will not be subject to the § 4980D excise tax until further guidance is issued, and in any event through the end of 2015.
  • Medicare and TRICARE Health Reimbursement Accounts (HRAs) are not subject to the § 4980D excise tax, unless future guidance so provides.

Which Employers Might Need to File Form 8928?

Employers who might need to file are:  large employers who offered premium reimbursement accounts after 2014 (or who still offer such accounts), and small employers (under 50 full-time employees and full-time equivalents) who continued to offer premium reimbursement arrangements after June 30, 2015.

Employers are required to file IRS Form 8928, to “self-report” their failure to comply with requirements under Code § 4980D, as well as to calculate and pay the tax due under Code § 4980D for failure to meet these requirement. One of the requirements under § 4980D is the ACA market reforms, including the prohibition on annual limits and the requirement to provide certain preventive care without cost sharing.

Employers that have or had employer premium payment plans but who are eligible for the relief described in IRS guidance (including the March 4th Q&As) are not required to file IRS Form 8928 for the period for which they qualify for the relief. However, if they continued to have noncompliant plans after their relief date ended (e.g., after June 30, 2015 for small employers), they would be required to file Form 8928 and pay the applicable excise taxes. Click here for the instructions to Form 8928.

Form 8928: Due Date & Penalties for Late Filing

When Form 8928 is due:  If an employer, insurer or third-party administrator fails to comply with one of the ACA requirements listed above (e.g., the ACA market reforms), they are required to file Form 8928 on or before the date the entity’s federal income tax return is due.

Penalties for Late Filing of Form 8928: Three different types of payments may apply: Penalty for late payment of tax, penalty for late filing, and interest on late taxes and on penalties imposed for late filing.

  • Penalty for late payment of taxes: Penalty of 1/2 of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if you can show that the failure to pay on time was due to reasonable cause.
  • Penalty for late filing of Form 8928: Penalty of 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. If filing is more than 60 days late, the minimum penalty is the smaller of the tax due or $100. The penalty will not be imposed if you can show that the failure to file on time was due to reasonable cause. Late filers must attach a statement to Form 8928 explaining the reasonable cause.
  • Interest: Interest is charged on both taxes not paid by the due date even if an extension of time to file is granted, and on penalties imposed from the due date, including extensions, to the date of payment for failure to file. The interest rate is determined under Code § 6621.

Next Steps for Employers

  • Employers who should talk with their legal counsel to discuss whether they should file Form 8928:

o   Employers of any size who are still offering premium reimbursement accounts

o   Small employers (under 50 full-time employees and full-time equivalents) who continued to offer premium reimbursement arrangements after June 30, 2015.

  • Employers should also talk with their legal counsel if they are considering offering some type of new account that has a different name but in fact reimburses employees for individual health insurance premiums.

These March  4th Q&As are the fifth written guidance from the IRS on this topic, and it seems that the IRS is making a point to let employers know these arrangements are NOT permissible and will result in excise taxes on the employers who sponsor such arrangements.