IRS Resets Clock on ACA Penalties
Marcia Zarley Taylor DTN Executive Editor
Fri Feb 20, 2015 11:05 AM CST
(Page 1 of 2)

HADDONFIELD, N.J. (DTN) -- The Internal Revenue Service this week issued a temporary peace offering to small employers who can't afford group health coverage and instead reimburse employees for their individual premiums. The practice remains illegal under the Affordable Care Act (ACA) for plans in place since 2014, but employers won't be liable for penalties of $100 per day per employee until July 1, 2015, IRS said.

Many farm businesses could be subject to fines for reimbursing employees for their individual health insurance coverage. IRS fears such fringe benefits make it too easy for employees to also claim tax subsidies on health care exchanges. (Photo by Ray Tsang, CC BY-SA 2.0)

The IRS guidance, Notice 2015-17 (…) retroactively exempts small employers with under 50 employees from the act's most severe penalties, but only through mid-year. Employers with standalone Health Reimbursement Accounts or Sec. 105 medical expense reimbursement plans received no reprieve. In the past, both Sec. 105 and Sec. 106 plans were able to provide tax-free fringe benefits to employees and the employer paid no FICA taxes on the reimbursements. Some employers blended both approaches into what's known as cafeteria plans.

"Now it's pretty clear that unless an employer offers full-blown insurance, any attempt to reimburse employee health care coverage is a violation," said CPA Andy Biebl, a principal with CliftonLarsonAllen LLP in Minneapolis. Biebl specializes in training CPAs on agricultural taxation in more than two dozen states each year and authors DTN's tax columns. The IRS is attempting to block employees from double dipping -- collecting tax subsidies on health care exchanges and receiving partial benefits from their employers.

Besides resetting the clock for fines for some employee reimbursements, the latest IRS notice gives Subchapter S corporations temporary relief. If they reimburse or directly pay individual health insurance policy premiums for Sub-S shareholders with at least a 2% ownership stake, they will be free from fines until the end of 2015. The reason is the agency is still sorting through conflicting rules for owner-employees.


The IRS first alerted employers in September 2013 that they would be subject to fines starting with 2014 health care plans, but many country CPAs and farm business owners were unaware of the policy change. The rule generated so much confusion, the Department of Labor issued a second clarification in November 2014.

Kristine Tidgren, a staff attorney for Iowa State University's Center for Agricultural Law and Taxation, has fielded hundreds of calls the past six months counseling panicked small business owners with how to comply with ACA.

"The impact on small employers is the biggest secret of that law," she told DTN. "Employers are distressed they can no longer help employees and are scrambling trying to fix it. It's caused huge disruptions for small business. People didn't really understand it until it hit their pocketbooks."

The main exception to IRS' strict interpretation are mom-and-pop businesses with only one-employee fringe benefit plans. Typically these are situations where the farmer-husband hires his spouse and reimburses her for family health insurance coverage.

Complicating the issue for business owners is that fringe benefit plan administrators have offered to represent their clients if audited by IRS, and continued to offer multi-employee health reimbursement arrangements.

"I don't see a way for that type of plan to continue, and I encourage people to follow the safe route when penalties are this high," Tidgren said. "There's a shocking level of misinformation and bad information on this."

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