Affordable Care Act
I penned an article last year admitting my procrastination in beefing up my knowledge of the provisions associated with ACA, but like many in our field, I’ve been reading, researching, and cramming on ACA since that time. Like most new laws affecting the taxpaying public, there are always planning opportunities as well as head-scratching moments. Well, I’m here to tell you that ACA is laced with myriad minefields, and the provisions are so far-reaching and dense, comprehension is daunting.
I’m going to attempt to provide a Cliff Notes version of some of the scarier provisions over the next several articles, but if you haven’t taken the time to research ACA and how it will affect you and your clients, you’d best get to it now.
Employee Payment Plans
(Author’s Note: be sure to see “The Gift” at the end of this article before committing hari-kari.)
While many small employers have shunned the cost and unwieldy administration of health plans altogether, another subset of employers have engaged in a plan allowing employees to obtain their own insurance only to be reimbursed by the employer. Simply put, the employee obtains coverage of his or her choice, provides proof of coverage to the employer, and the employer reimburses the employee for the premiums or pays the premiums directly for that employee. The employer deducts the costs as insurance expense, while the employee is not subject to taxable income under the provisions of IRS Revenue Ruling 61-146. These are widely known as Employee Payment Plans (EPPs). In our practice, we’ve seen a variety of these types of plans through the years.
Well, with the advent of ACA, EPPs now represent one of the ugliest penalty minefields within the Act. While a reading of the Act itself does not directly address EPPs, the IRS issued Notice 2013-54 in late 2013 indicating EPPs will not fulfill the requirements of ACA because they are considered to impose an annual limit regarding the cost of the market coverage for the individual. Basically, the technical interpretation said EPPs violate the spirit of the law.
If you, as an employer, operated under an EPP in 2014, you need to get yourself into damage control mode immediately. Under ACA, EPPs are forbidden, and they are forbidden with a heavy hand. Beginning January 1, 2014, an employer is subject to a $100 per day/per employee penalty for continuing to use an EPP (§ 4980D). Do the math! If you were unaware of this provision in ACA, and you reimbursed your employees under an EPP for 2014, you’re staring at a potential penalty of $36,500 per employee ($100 per day x 365 days).
There are currently three available options to avoid this onerous penalty in the future: 1) establish a group plan satisfying the requirements of ACA, 2) provide raises to your employees in place of the premium reimbursements, or 3) do away with employer-provided health coverage (assuming you’re not required to provide it under ACA). Obviously, if an employer is predisposed to EPPs, option 2 is the more viable proposal.
During the research and writing of this article, the Service issued Notice 2015-17 providing relief to employers utilizing EPPs for all of 2014 and up through June 30, 2015 for employers with less than 50 full-time employees (or equivalents). So, most small businesses that used EPPs in 2014 will get a pass, but don’t expect another one. Review your options and make some changes now.
This is sure to get more press as horror stories emerge. For instance, an employer with 50 or more full-time employees (or equivalents) will be facing dark days if they utilized an EPP in 2014. If you’ve not done the math, an employer providing an EPP to 50 employees in 2014 could face a penalty of $1.8 million! Now, instead of looking for a tax attorney, we’re looking for a bankruptcy attorney.