Ask the Taxman by Andy Biebl

Avoid an Affordable Care Act Trap

IRS won't let most employers reimburse employees for medical insurance and other costs instead of offering group coverage. (Photo by Eric Norris, CC BY 2.0)

DTN Tax Columnist Andy Biebl is a CPA and principal with the accounting firm of CliftonLarsonAllen LLP in New Ulm and Minneapolis, Minn., and a national authority on agricultural taxation. His Dec. 31 column on the Affordable Care Act's new restrictions on reimbursing employees for health insurance purchased off the farm triggered an avalanche of mail, in part because most small business violators were unaware they are subject to $100-per-day-per-employee penalties. To read the original column, scroll to the bottom of this article. To pose questions for upcoming columns, email AskAndy@dtn.com.

QUESTION:

In your January column, "More Affordable Care Act Surprises," you indicated that employer-provided health reimbursement arrangements (HRAs) were permitted only in three very limited circumstances when the business doesn't provide group insurance: (1) One employee participating plans; (2) Reimbursements limited to ancillary benefits such as dental and vision; or (3) Retiree-only reimbursement arrangements.

If a husband employs only his wife as a full-time employee, can she be reimbursed for their insurance plan and also have a Section 105 medical reimbursement plan for other doctor bills, prescriptions, etc.? The only other employee is part-time. Also, the three permitted exceptions are all separate alternatives, correct?

ANSWER:

Yes, the "or" word in those three exceptions is critical and more than one may apply in a given circumstance. The one employee exception is not limited to ancillary benefits or to retiree-only arrangements.

In your case, if the part-time employee is less than 25 hours per week or annually works less than seven months, that person can be excluded from the medical reimbursement plan without violating the Section 105 discrimination rules. Thus, the premium reimbursement and the medical reimbursement plan for the only full-time employee, the spouse, are permitted under the one-employee exception to the ACA market reform rules.

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QUESTION:

I want to clarify some reporting around our Health Reimbursement Arrangement (HRA). We provide an HRA (i.e., a Section 105 plan) with only one participating employee. Is that plan in compliance with the ACA, and do we need to file more paperwork than the annual Form 720 to pay the $2 PCOR fee? We read about a new Affordable Care Act fee for reinsurance and health insurers administered by Health and Human Services, and are concerned that this HHS fee could also be required for our little HRA plan.

ANSWER:

Your one participant HRA is exempt from the ACA market reforms. And you are properly reporting the small excise tax for Section 105 plans known as the PCOR fee (reported in Part II of the Form 720, at code 133). However, good news on the reinsurance fee: This reporting to HHS, with a more expensive $63-per-participant fee, is only required for plans that constitute major medical coverage. The typical small business HRA that has caps and limits on its reimbursements is not a major medical plan and is not subject to this HHS reinsurance program fee.

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QUESTION:

In your recent article, you listed three circumstances under which stand-alone HRA reimbursement arrangements are permitted (see Q.1 above). We have three employees and it looks like we would not meet the one-employee exception for insurance and medical expense reimbursement, but would like to provide reimbursement for vision and dental. Can you clarify that this is acceptable?

ANSWER:

Yes, the one employee exception and the ancillary benefit exception are two separate and distinct rules. Thus, with three employees, you are very restricted on what reimbursements can be provided. But, a Section 105 medical reimbursement plan or HRA that, by its terms, is limited to reimbursing out-of-pocket vision and dental costs would be an acceptable arrangement that did not violate the ACA market reforms. Of course, most employees do not have substantial annual out-of-pocket vision and dental costs. But whatever you provide under this plan will provide value to the employees in a tax-efficient manner. As you probably understand, these arrangements are tax deductible to the employer and tax-free for both income tax and payroll tax purposes to the employee.

EDITOR'S NOTE: Andy's Dec. 31, 2014, column also appeared in the January 2015 issue of The Progressive Farmer and is reprinted below. For past DTN articles on how employers are affected by ACA, go to http://www.dtn.com/…

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Taxlink by Andy Biebl

More Affordable Care Act Surprises

Don't attempt to reimburse employees for health insurance or medical costs. Under a retroactive ruling for the Affordable Care Act, the government will impose a $100/day fine per employee on you.

By Andy Biebl

DTN Tax Columnist

The Affordable Care Act (ACA) is unlike any tax legislation I have ever seen. We are more than four years since enactment, yet the surprises keep unfolding. The latest administrative decree from the Department of Labor (DOL) will require some coordination between ag producers and their tax preparers.

BACKGROUND

In lieu of providing group health insurance to employees, many small employers have used reimbursement arrangements that assist employees with the premiums on their individual policies. Some employers also added medical reimbursement plans that provided a limited reimbursement of other out-of-pocket health costs. These were very tax-efficient: deductible to the employer but tax-free to the employee.

ACA MARKET REFORMS

Beginning with the 2014 health plan year the ACA market reform rules prohibit these types of reimbursement arrangements. Since they are not full-blown ACA compliant group plans, they expose the employer to a costly $100 per day per employee penalty. These standalone reimbursement arrangements are permitted only in very limited circumstances: (1) the reimbursement arrangement has only one employee participating; (2) the reimbursements are limited to ancillary benefits, such as a vision plan, dental plan, or long-term care premiums; or (3) the reimbursements are a retiree-only arrangement. Medical reimbursements are also permitted if integrated with a full coverage group health plan.

THE TAXABLE ALTERNATIVE

Based on mid-year guidance from the IRS, the consensus was that where these reimbursement arrangements were no longer permitted, the employer could simply solve the problem by treating the amounts as taxable compensation to each employee. But in November, the DOL clarified that any employer reimbursement plan, other than the limited exceptions previously noted, were a violation of the market reforms, whether treated as pre-tax or post-tax to the employee. Thus, maintaining these plans as a taxable benefit also exposes the employer to the prohibitive $100 per day per employee penalty. (For details from the Department of Labor go to http://www.dol.gov/…).

THE REMEDY

Employers with these reimbursement arrangements should rescind any written plan documents, retroactive to the first day within 2014 for which the plan was effective. No further reimbursements should occur. Prior reimbursements should be treated as taxable compensation. If these actions are taken within 30 days of becoming aware of this latest DOL guidance, the employer should qualify for a "reasonable cause" exception to the $100 per day per employee penalty. Finally, IRS Form 8928, which is used to report the $100 per day penalty, should be filed for 2014, but should have a zero entered on line 21 of Part II, indicating that the reasonable cause exception is being used by the taxpayer to eliminate the penalty.

Small employers are really left with only two choices to assist employees with their health care costs. Either they provide group health insurance to their employees or they increase taxable compensation without any connection to the employee's out-of-pocket health care costs.

(MZT/AG)

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