Taxlink by Andy Biebl

A Broken Tax System

IRS rulings belatedly changed how many small business owners could offer employee fringe benefits. (DTN file photo by Nick Scalise)

By now, we probably all understand that the Affordable Care Act (ACA) is a massive tax bill. The individual mandate imposes a tax on any individual without health insurance, the large employer mandate imposes a tax on employers not providing health insurance, and individuals buying health insurance through an exchange are subsidized with a tax credit.

These were all apparent after enactment of the ACA in March of 2010. And at that point, we thought small businesses under 50 employees were immune from the broad reach of the ACA. It took until mid-2013 before the IRS publicly discovered the "market reforms" that are also built into the ACA's tax provisions. These affect any employer who provided health benefits with two or more employees.

THE MARKET REFORMS

These tax code sections require employer-provided health benefits to offer certain unlimited benefits or no-cost services. Employers in violation are assessed an excise tax of $100 per day per employee or $36,500 per employee per year. The 2013 IRS guidance explained that traditional small employer tax-free fringe benefits violated these market reforms. As a result, employers could no longer reimburse out-of-pocket employee medical costs such as doctor and dental bills nor pay or reimburse health insurance premiums on individual employee policies.

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Later IRS guidance clarified that treating these reimbursements as taxable wasn't a defense against the expensive $100 per day per employee tax. Essentially this guidance left small employers with only two stark choices: ACA-compliant group health coverage for your employees or end the tax-free reimbursements and instead substitute more expensive taxable compensation. Given the high cost of small group health insurance, most employers were forced to the latter choice.

THE IRS RELIEF

In mid-February 2015, after W-2 and other payroll tax reports had been submitted, the IRS finally responded to requests for relief from the small business community. Notice 2015-17 eliminates the $100-per-day-per-employee penalty from Jan. 1, 2014, to June 30, 2015, for employers under 50 full-time and FTE (full-time equivalent) employees. But this relief is only available for employers reimbursing employee individual health insurance policy premiums; the excise tax still applies for other out-of-pocket medical expense reimbursements.

My criticism of this relief is its tardiness. Many small businesses, carefully following the IRS guidance in 2013, paid unnecessary payroll taxes and issued W-2 forms taxing fringe benefits that are now retroactively free! And those who ignored or overlooked the new law and kept on reimbursing are given a late free pass. That's a broken system.

There's more. The IRS punted on the question of reimbursements to S corporation shareholders for their health insurance. The ACA directly conflicts with longstanding IRS guidance. Apparently five years has been an insufficient time for the IRS to resolve this. Its latest missive says no penalties for 2014 and 2015, and maybe by then the IRS will decide what the rules are!

Editor's Note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., former president of the Minnesota Society of CPAs and a national authority on ag taxation. He writes a monthly column for our sister magazine, The Progressive Farmer. For past DTN articles on how employers are affected by ACA, go to http://www.dtn.com/…. To pose questions for future tax columns, e-mail AskAndy@dtn.com.

(MZT/CZ)

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