Your Accountant can help you avoid costly penalties that both small and large companies can be faced with when setting up employer health coverage for employees.
Strategy No. 7: Avoid Employer Penalty on Paying or Reimbursing Employee Health Premiums
The 2010 Affordable Care Act (ACA) contains restrictions on employer-provided group health plans starting in 2014. These restrictions generally apply to all employer-provided group health plans including those furnished by small employers with fewer than 50 workers.
The penalty is $100 per-day per-employee, which can amount up to $36,500 per-employee over a full year. In some cases the restrictions can penalize employers for offering plans that reimburse employees for premiums paid for individual health insurance policies.
Employer payment arrangement help employees obtain health coverage without a company health insurance plan because the employer reimburses employees for premiums paid for their individual health insurance policies. To qualify for tax-free treatment under the tax rules, the employer must make the reimbursements under a written Section 105 medical reimbursement plan and verify that the reimbursements are spent for health insurance coverage. (IRC Secs. 105 and 106 and Rev. Rul. 61-146).
ACA Market Reform Penalties generally apply to Employer Payment Arrangements like this because they are generally considered to be group health plans that are subject to the ACA market reform restrictions and penalties.
S Corporation Employer Payment Arrangements for More-Than-2% Shareholder-Employees treat insurance reimbursements as additional taxable wages that are not subject to the Social Security or Medicare taxes. Qualifying more-than-2% shareholder employees deduct their premiums above the line on their individual federal income tax return under self-employed health insurance premiums. The company deducts the reimbursements as compensation expense. These S corporation arrangements can now trigger ACA market reform restrictions and may trigger the punitive Section 4980D market reform penalties.
If you are unsure if the insurance plan is compliant contact Brown CPA Group, Ltd. to review your current plan and assist in the installation of a new or modified tax-compliant insurance repayment plan.
Repayment plans that reimburse Medicare Insurance Premiums can trigger penalties if it’s not properly integrated with a compliant employer-provided group health plan.
If you are unsure if the insurance plan is compliant, or if you are not sure your Medicare reimbursement plan is properly integrated with the rest of your group plan, contact Brown CPA Group, Ltd. to review your current plan and assist in the installation of a new or modified tax-compliant insurance repayment plan.
The ACA market reform restrictions do not yet apply to employer payment arrangements for one employee employers. Notice 2015-17 seems to confirm that this one-employee exception applies even if the employee has family coverage that covers a spouse or dependent who is also an employee.
Employer payment arrangements must cover all full-time employees in order to avoid IRS nondiscrimination rules [IRC Sec. 105(h)].
Employers can exclude workers who have less than three years of service, or have not attained age 25, or are part-time or seasonal employees [Reg. 1.105-11(c)].
In conclusion, ACA market reforms can penalize the use of employer payment arrangements to reimburse employees for individual market health insurance policy premiums (unless only one employee participates in the arrangement). Also, employers cannot directly pay premiums for individual market policies on behalf of their employees without possibly triggering the Section 4980D market reform penalties. Employers can avoid penalties by providing a tax-free fringe benefit by paying for an ACA-approved group health plan.
To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.
About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd. We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.
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