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Qualified Small Employer HRA Avoids $100 per Day Penalty

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Background

Over the past few years, there has been a $100 per day per employee penalty for employers who provided certain Health Reimbursement Accounts (HRAs) and/or Employer Payment Plans.

Under an HRA, an employer reimburses employees for the medical expenses up to a certain limit.  The reimbursement is deductible by the employer and tax-free to the employee.

Under an Employer Payment Plan, the employer either reimburses employees for the cost of health insurance premiums or directly pays the insurance company for the employees’ health insurance coverage.  Again, the payment is deductible by the employer and tax-free to the employee.

Under the market reform provisions of Obamacare, these plans became disfavored and subjected the employer to a $100 per day per employee (i.e., $36,500 per employee per year) penalty.  The primary reason for the penalty is because the market reform provisions eliminated any annual or lifetime cap on benefits.  HRAs are generally subject to an annual cap and Employer Payment Plans are deemed to be capped at the cost of the employee’s premium that is being paid.

Qualified HRAs No Longer Subject to $100 per Day per Employee Penalty

Qualified HRAs are exempt from the $100 penalty.  Employer Payment Plans remain subject to the penalty.

Eligible employers that do not offer group health insurance coverage to any employees can offer a Qualified Small Employer HRA (QSEHRA).  Eligible employers are employers that are not applicable large employers under Obamacare (applicable large employers have 50 or more employees).

The employer must offer a QSEHRA to each eligible employee.  An eligible employee is defined broadly as any employee; however, the employer can elect to exclude the following:

  • Employees who have not completed 90 days of service
  • Employees under age 25
  • Part-time or seasonal employees
  • Employees covered by a collective bargaining agreement covering accident and health benefits
  • Nonresident alien employees with no U.S. source income

A QSEHRA must be provided on the same terms to all eligible employees and funded entirely by the employer.  Payments and reimbursements are limited to $4,950 per year ($10,000 for family coverage) and are prorated if the employee is not covered for the whole year.  For example, if a single person starts employment on July 1, then the limit is reduced by 50%–$2,475 ($4,950 times 50%).  These amounts will be adjusted for inflation.

Payments/Reimbursements are Taxable If Employee Does Not Have Minimum Essential Coverage

Unlike a regular HRA, premiums for individual health insurance policies, as well as other medical expenses such as deductibles and copays, can be paid or reimbursed by a QSEHRA.  However, any payments or reimbursements from a QSEHRA for medical care (including insurance premiums) that are provided when an individual does not have minimum essential coverage are included in the employee’s income.  Generally, an individual health insurance policy qualifies as minimum essential coverage, but the employer must verify that the employee has minimum essential coverage.  Payments under a QSEHRA will affect the employee’s amount and qualification for the premium tax credit.

Employer Must Provide Notice to Employees

An employer funding a QSEHRA must provide written notice to each eligible employee no later than 90 days before the beginning of the year (or the date the employee first becomes eligible to participate).  The notice must state the amount that will be available for reimbursement or payment for the year.  Additionally, the notice must remind the employee that any benefits available under a QSEHRA must be disclosed to the health insurance marketplace if the employee applies for coverage through the marketplace and requests advance payment of the premium tax credit.  The notice must also include a statement that if the employee does not have minimum essential coverage for any month, he may be subject to a penalty for the month and that payments and reimbursements under the QSEHRA may be included in income.

Employers that do not provide proper notice to employees are subject to a penalty of $50 per employee.  The total penalty that can be assessed for one year cannot exceed $2,500.

Finally, amounts paid under a QSEHRA must be reported on the employee’s W2 (even though the payments are generally tax-free).

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Exemptions from the Penalty for Not Having Health Insurance

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People who do not have qualifying health insurance are subject to a penalty under the Affordable Care Act.  The individual mandate was repealed by the Tax Cuts & Jobs Act; however, the repeal does not take effect until after December 31, 2018.  It still applies to the 2018 tax year for which tax returns will be filed in the next several months.  Fortunately, a number of exemptions exist that protect individuals from being subject to the penalty.  These exemptions include:

  • Members of religious sects recognized by the Social Security Administration who have a religious conscience exemption
  • Members of health care sharing ministries
  • Incarcerated individuals, other than those who are incarcerated pending the disposition of charges
  • Members of federally recognized Indian tribes
  • Individuals qualifying for services through an Indian health care provider or the Indian Health Service
  • Individuals with short coverage gaps of two months or less. An individual is treated as having coverage for a full month if she is covered for at least one day during a month.
  • Individuals whose household or gross income is below the threshold for having to file an income tax return
  • Citizens living abroad and certain noncitizens
  • Individuals who are ineligible for Medicaid solely because the state in which they reside did not participate in Medicaid expansion
  • Individuals with household income below 138% of the applicable year federal poverty line for their family size who reside in a state that did not expand Medicaid coverage
  • Individuals enrolled in certain Medicaid programs that are not Minimum Essential Coverage
  • Individuals who could not afford coverage based on their actual household income
  • Individuals who could not afford coverage based on their projected household income.
  • Individuals in families where the aggregate cost of self-only coverage for two or more employed individuals is unaffordable and the cost of employer-sponsored coverage for the entire family is unaffordable

The General Hardship Exemption

In addition, individuals who qualify for a general hardship exemption will be exempt from the penalty.  Federally facilitated and federal partnership marketplaces may consider the following circumstances as keeping an individual from obtaining coverage under a qualified health plan:

  • Becoming homeless.
  • Being evicted or facing eviction or foreclosure.
  • Receiving a shut-off notice from a utility company.
  • Recently experiencing domestic violence.
  • Experiencing the death of a close family member.
  • Experiencing a fire, flood, or other natural or human-caused disaster that results in substantial damage to the individual’s property.
  • Filing for bankruptcy.
  • Incurring unreimbursed medical expenses that resulted in substantial debt.
  • Experiencing unexpected increases in essential expenses due to caring for an ill, disabled, or aging family member.
  • Claiming a child as a tax dependent when that child has been denied coverage in Medicaid and CHIP, and another person is required by court order to provide medical support to the child.
  • As a result of a marketplace appeals decision, being determined eligible for (1) enrollment in a QHP, (2) lower costs on monthly premiums, or (3) cost-sharing reductions for a period of time during which the individual was not enrolled in a QHP through the state marketplace.

State-based marketplaces can use the same criteria, but have the flexibility to develop their own criteria, as long as they meet the requirements in the HHS regulations.

 

Is This the End of the Individual Mandate?

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crazy-sign1The IRS recently announced that it will not reject 2016 tax returns that are silent on whether the taxpayer has complied with the individual mandate of the Affordable Care Act.  These provisions require taxpayers to have qualifying health care coverage, qualify for an exemption, or pay a penalty.  The IRS previously stated that such “silent” returns would be rejected; however, the IRS has shifted its policy to comply with a recent Presidential executive order.  While the individual mandate is still law, it is possible that the IRS may not enforce the penalty.  Caution is advisable.  It is still very early in this process and guidance is still vague.

Background on the Individual Mandate

On their tax returns, taxpayers who had qualifying health coverage for every month of 2016 for themselves, their spouses, and dependents had to check the box on line 61 (Health Care: Individual Responsibility).  A taxpayer that couldn’t check the box because there were coverage lapses must generally either claim a coverage exemption or pay the penalty for the lapse months.

The Executive Order

President Trump’s first executive order stated his intent to seek prompt repeal of the ACA.  The executive orders stated:

To the extent permitted by law, the Secretary of Health and Human Services and the heads of all other executive departments and agencies with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.

While the Trump Administration cannot simply repeal the individual mandate, which is part of a law passed by Congress, they could make the regulatory exemptions from it so broad that the exemptions swallow the rule and the individual mandate is essentially unenforced.  Possibly…

One cause for concern is that even though the IRS will now process returns that are silent on compliance with the individual mandate, the IRS says that if it has questions about a tax return, taxpayers may receive follow up questions and correspondence at a future date.

Based on existing law prior to the executive order, the IRS will not issue liens or levies to collect the penalty and they will not initiate audits based on nonpayment of the penalties.  The IRS’ only recourse for nonpayment of the penalty is to reduce refunds owed to taxpayers.

If you have any questions on how this applies to you, please feel free to give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Keep An Eye Out for Obamacare Tax Forms

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Form 1095Tax season 2016 is well under way.  This tax season is the second year that the Affordable Care Act has an effect.  Last year was the first year the Form 1095-A was distributed to taxpayers who purchased health insurance from the exchange.  This form was used to (1) prove that individuals had qualifying health insurance coverage to avoid the Shared Responsibility Penalty and (2) calculate the Premium Subsidy available to qualifying individuals to help them afford their health insurance premiums.

This year, two more forms will be issued to taxpayers so they can prove that they had qualifying health insurance throughout 2015.  Form 1095-C will be issued to employees who work for Applicable Large Employers (ALEs).  ALEs are employers that employ 50 or more full time equivalents and are required to provide their employees with health insurance under the Affordable Care Act.

Form 1095-B will be issued by all other providers of health insurance (e.g., small employers, Medicaid, etc.)

The deadline for the Marketplace to provide Form 1095-A is February 1, 2016.  The deadline for coverage providers to provide Forms 1095-B and employers to provide Form 1095-C has recently been extended to March 31, 2016.

Yes, Forms 1095-B and 1095-C don’t have to be issued until March 31, 2016 while the deadline to file tax returns this year is April 18 (Emancipation Day is being recognized on April 15 so the filing deadline is April 18).  Many taxpayers therefore won’t receive Forms 1095-B or 1095-C by the time they file their tax returns.  It is not necessary to wait to receive these two forms in order to file.  Taxpayers may instead rely on other information about their health coverage and employer coverage to prepare their returns.  Taxpayers should retain health insurance statements and other proof that they had coverage during 2015.

Taxpayers who will receive Form 1095-A must wait until they receive this form to file their tax returns.  The form has important information required to calculate the Premium Subsidy.

To see how this applies to you, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Hiring Someone? You Must Have Employees Fill Out These Forms.

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Most employers know that when they hire a new employee, they must have the employee fill out a Form W4 so the employer can determine the amount of taxes to withhold from the employee’s paycheck.  Unfortunately, there are other forms new employees must fill out or the employer could be subject to penalties.  This post will describe those other forms.

Form I-9

Form I-9 is required to document verification of the identity and employment authorization of each new employee (both citizen and noncitizen) to work in the U.S.  Employers are responsible for completing this form and retaining the form.

Newly hired employees must complete and sign Section 1 of the form no later than the first day of employment.  Under this section, the employee states his citizenship/residency status under penalty of perjury.  The employer must then obtain documentation that verifies the employee’s identity and employment authorization.  This can be done by obtaining a copy of the employee’s driver’s license and Social Security Card, although other forms of documentation may be obtained.

Michigan New Hire Reporting Form

Federal law requires employers to report information about newly hired and rehired employees to a state agency within 20 days of the hire/rehire.  The information on this form is matched with state and national data to help collect child support through income withholding and reduce fraudulent unemployment and workers’ compensation payments.

A copy of the Michigan New Hire Reporting Form can be obtained here.

Affordable Care Act Notices

This requirement came into existence two years and is described in more detail here.  An employer covered by the Fair Labor Standards Act must provide each of its employees (part-time and full-time) with a notice informing the employees of their right to enroll in health insurance coverage through a state insurance marketplace (exchange).

Employers who have at least 1 employee engaged in commerce and who have gross annual sales of $500,000 or more are covered by the Fair Labor Standards Act.  So many employers are subject to this requirement.

The Department of Labor has two model forms employers can use to give to their employees.  If you already provide health coverage for your employees, use this model form.  If you do not provide health coverage for your employees, use this model form.

Form W-4

Finally, employees fill out Form W-4 so their employers can determine how much estimated tax should be withheld from the employees’ paychecks.   If an employee’s allowances under state income tax differ from the number of allowances under the Federal Form W-4, the employee may fill out a Form MI-W4 to claim a different number of allowances for state income tax purposes.

If you have questions on how this relief applies to you, give us a call.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

$100 Per-Day Per-Employee Penalty Delayed (but not by much)

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Over the past several months, we’ve written about the $100 per-day per-employee penalty for employers who reimburse or directly pay for their employees’ individual health insurance policies.  This penalty was to be effective for 2014 and later years.  The IRS recently issued Notice 2015-17 that provides employers a little more time before this penalty becomes effective.

Background

For years, many employers have provided health coverage to their employees by either directly paying for or reimbursing employees for their individual health coverage.  These payments were deductible to the employer and tax-free to the employee.  Under the Affordable Care Act market reforms, if these plans covered more than one employee, the plan would be considered a group health plan.  As such, the plan must not have annual or lifetime limits on coverage.  These plans were deemed to have limits equal to the premium the employer paid on behalf of the employee.  Because of this, the employer would be subject to a $100 per-day per-employee penalty (i.e., $36,500 per employee per year).

The Relief

The IRS and the Department of Labor recently realized (eventually they catch on) that some employers that have offered these plans may need additional time to obtain group health coverage or adopt a suitable alternative.

The latest guidance provides that the penalty will not be applied for 2014 for employers that are not Applicable Large Employers for 2014.  An Applicable Large Employer is an employer with 50 or more full time employees (including full time equivalents) during the prior year.   The penalty also will not apply for January 1, 2015 to June 30, 2015 for employers that are not ALEs for 2015.  After June 30, 2015, all non-compliant employers will be subject to the penalty.

This relief applies only for payment of or reimbursement of health insurance.  The relief does not apply to health reimbursement accounts or other arrangements that reimburse employees for medical expenses other than insurance premiums.

Guidance for S Corporations

The IRS and the Department of Labor are contemplating additional guidance on how these rules apply to S corporations.  Until such guidance is issued, and at least through the end of 2015, the penalty will not be asserted against an S corporation for a plan that provides individual health coverage to S corporation shareholder-employees.  Basically, the penalty will not apply to S corporation shareholders through the end of 2015, but it may apply to other employees after June 30, 2015.  If a plan covers 1 shareholder and 1 employee, the plan covers two employees and is a group health plan and the penalty would apply to the 1 employee (after June 30, 2015).

Quick (but expensive) Fix

One way around this penalty is for an employer to increase an employee’s taxable compensation, but not to condition the increase on the purchase of health insurance.  If the increase is conditioned on the employee using the increased compensation to purchase health insurance coverage, the penalty will apply (after June 30, 2015.)  Basically, the employee must pay income and FICA tax on the income, and the employer will pay payroll taxes on the payment.

If you have questions on how this relief applies to you, give us a call.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.