What is the ACA Section 4980D Penalty?
The annual penalty is assessed to employers who pay for or reimburse individual health insurance premiums, in whole or in part, for their employees or S corporation shareholders. The penalty applies whether the payment is made to the employee or to the insurance company directly. The penalty for violating these rules is $100 per participant, per day, or $36,500 per participant per year. (Capped at $500,000 per year)
Who is a Small Employer?
A small employer is one who during a calendar year has employed an average of less than 50 full-time or full-time equivalent employees on business days during the preceding calendar year.
How does this change what I was providing or reimbursing for my employees or S Corporation owners?
The agencies responsible for implementing the ACA have issued guidance regarding how to apply the market reform provisions of the ACA to a business. Generally, an employer’s ability to use medical reimbursement plans or offer employer pretax reimbursement of individual insurance premiums has been eliminated.
The following fail to meet ACA market reform requirements:
Section 125 cafeteria plans set up to allow employees to electively reduce compensation to fund individual policy premiums on a pretax basis.
Employer reimbursements to and employee or S Corporation owner for premiums for an individual policy.
Employer payments directly to an insurance company on behalf of an employee or S Corporation owner.
Can I still give my employees or S corporation shareholder reimbursement for insurance premiums?
The only way an employer can assist an employee (or S corporation employee/shareholder) with the cost of premiums for individual policies or other out-of-pocket medical expenses is to increase the employee's compensation and place no restrictions on the use of the increased compensation. This means that if an individual's salary (for FIT and FICA) is increased and the employee can choose to spend the money on health insurance premiums, but is not required to do so, a plan (for ACA purposes) has not been established.
If I am a greater than 2% owner, when do the penalties apply?
The Section 4980D penalties on S Corporation owners greater than 2% will not be asserted for any failure to satisfy the market reforms through the end of 2015 and until additional guidance is issued by either the IRS or Treasury Department. After 2015, S Corporations should not directly pay premiums for an individual health insurance policy on behalf of any employee or owner.
What can i offer an employee for fringe benefits relating to health plans?
Employers can do either of the following:
Provide a tax-free fringe benefit in the form of an ACA-approved group health plan. As long as the S corporation employee/shareholder is covered under a group health plan established by the business, and that group health plan meets the ACA market reform requirements, it appears that the premiums can be paid on behalf of the employee/shareholder without being taxed for FICA purposes. However, as of the date of this publication, the IRS has not issued guidance on this.
A small employer (50 or fewer employees) may provide group insurance through the SHOP Marketplace and provide a Section 125 plan for employee pretax funding of any employee premium. An employer can offer group healthcare to their employees inside or outside the SHOP.
Does the Section 105 medical reimbursement plan still exist and how can it be used?
“IRS Notice 2013-54 identifies several limited exceptions under which Section 105 medical reimbursement plans and HRAs may continue to reimburse employee medical expenses without violating the market reforms. Section 105 plans are still permitted for ancillary benefits such as dental and vision coverage, long-term care, and disability coverage because these are not part of the essential health benefits to which the ACA market reform provisions apply. Additionally, the market reform provisions do not apply to plans that cover only one employee. Therefore, if the only employee of the S corporation is the owner/employee, it appears the business can reimburse for individual policy premiums. The final exception from the ACA market reform rules applies for a retiree-only medical reimbursement plan.”
Thompson Reuters Checkpoint
Dea Johnson, CPA
Thompson Reuters Checkpoint
Greg DeKeuster, MyHealthCareStrategy