Fri Feb 20, 2015 03:29 PM CST
Clock Reset on ACA Penalties 02/20 11:05 "No Double Dipping" Still in Force A retroactive IRS notice buys time for small employers to discontinue health reimbursement plans made illegal under the Affordable Care Act. By Marcia Zarley Taylor DTN Executive Editor 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. 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. FULL OF SURPRISES 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." One unfortunate aspect of the Feb. 18 IRS notice is that it came too late for business owners who attempted to comply with IRS' earlier position. "The delay in providing this relief is inexcusable," Biebl said. "Because of that onerous $100-per-day penalty, small employers rescinded premium reimbursement plans, and instead increased employee taxable wages. And by now in mid-February, W-2s and Social Security tax reports for 2014 have been filed, and in some cases 1040s of employees have been prepared. So today we learn that this was all unnecessary, thanks to this retroactive relief for 2014. The small employer's choice is now to either go through a complicated and expensive process of amending returns (corrected W-2s to help the employees for their 2014 1040s by treating the premium reimbursements as a tax-free fringe, and amended Social Security tax payroll reports), or just swallow the overpaid taxes on both employer and employee side because of the costs and hassles to fix." For more details, see DTN's archive of Affordable Care Act articles at Marcia Taylor can be reached at Follow Marcia Taylor on Twitter@MarciaZTaylor (AG\CZ) Copyright 2015 DTN/The Progressive Farmer. All rights reserved.