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.
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:
- the reimbursement arrangement has only one employee participating;
- the reimbursements are limited to ancillary benefits, such as a vision plan, dental plan, or long-term care premiums;
- or 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 here).
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.
Editor’s Note: Andy Biebl is a CPA and principal with the firm of CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., and a national authority on ag taxation. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future tax columns, e-mail AskAndy@dtn.com.