ACA excise tax alert
McGladrey, the national assurance, tax and consulting firm with an office on Canal Street in Stamford, recently addressed IRS Notice 2013-54, “which impacts tax-favored arrangements for paying employee health insurance premiums and medical expenses.”
Not knowing the notice details could sting mightily: a tax of $100 per day per affected employee.
The new guidelines include those for Section 125 cafeteria plans; premium-only plans (POPs); premium reimbursement plans; health reimbursement arrangements (HRAs); medical expense reimbursement plans (MERPs or Section 105 plans); and health flexible spending accounts (FSAs).
While those acronyms have become common health currency, the IRS says they will not meet the Affordable Care Act requirements prohibiting annual dollar limits on benefits and employee cost-sharing on preventive services, but only if the arrangements provide tax-free benefits for individual insurance or are not “integrated” with a group medical plan.
McGladrey directors Jill Harris and Bill O”™Malley warn that employers may need to restructure or terminate these tax-favored arrangements to avoid an excise tax of up to $100 per day per affected worker. For-profit and nonprofit employers of all sizes, including those with fewer than 50 employees, can be subject to the tax starting in 2014, they said. Their essay was titled, “Affordable Care Act impact on certain health care plans.”
The asterisk of relief is that the IRS can waive part or all of the excise tax if the employer”™s failure to meet the ACA requirements is due to reasonable cause and not willful neglect. McGladrey recommends “striving to comply” rather than booking on IRS forgiveness.
“In general,” Harris and O”™Malley agree, “employers will have exposure for the excise tax if they pay or reimburse premiums for employees”™ individual health insurance policies or allow employees to use pre-tax salary reductions to pay for individual health insurance policies.”
The tax also becomes a possibility if a company offers a health FSA but no group health plan or has an employer contribution to the health FSA exceeding a certain dollar amount. Differently paid, nonintegrated policies of individuals who may have struck their own insurance deals with a company, too, face scrutiny with the possibility of a tax penalty.
In short, the authors stated, “For plan years starting in 2014, premiums for individual health insurance generally cannot be paid or reimbursed on a tax-free basis without creating excise tax exposure. This includes individual health insurance purchased through the new health care exchange/marketplace.” But, they continued, “Individual policies for dental, vision, disability, accident only (AD&D), long-term care, hospital indemnity, specified disease (e.g., cancer) and Medicare supplemental insurance may still be reimbursed tax-free without triggering the excise tax.”