There's some good news for small employers that have been paying employees the cost of buying their own health coverage. If you're one of those employers, you're probably aware that a few months ago that arrangement was deemed unacceptable and, therefore, subject to hefty penalties. Now the IRS has given you a temporary reprieve, but as always, there's nothing simple with the IRS. Here's what you need to know.
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Small Employers Get Reprieve on Health Premium Reimbursement Plans
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Small Employers Get Reprieve on
Health Premium Reimbursement Plans
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Background: Historically, employers that wanted their employees to be
protected with health coverage, but didn't want the hassle of having a
company health plan, could simply give them an amount of money sufficient
to reimburse them for the cost of buying that coverage or some portion of it.
As long as the individuals provided evidence that they used those funds for
that purpose, the dollars were excludable from taxable income for the
employees.
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Alternatively, employers could just pay the premiums directly to the insurance
carrier.
Back in November 2014, however, the Department of Labor (DOL) declared
that companies reimbursing employees for medical care instead of offering a
health care plan is equivalent to a health plan and is subject to the Affordable
Care Act (ACA).
And since those reimbursement arrangements failed to meet ACA
requirements in two ways -- that is, the condition that group health plans
have no annual limits on benefits, and also that no co-pay for certain
preventive health services must be paid -- they were ruled to be noncompliant
with the law.
4. $36,500 Per Employee Penalty
This DOL ruling doubled down on a 2013 decree by the IRS saying essentially
the same thing. The kicker was that, beginning in 2014, employers with such
reimbursement arrangements in place would be subject to a $36,500 penalty
per employee.
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The only remedy offered by the DOL was for employers to gross up those
contributions (that is, add to them enough money to cover the tax liability
employees would incur as a result of receiving the payments), plus make it
clear to employees that they could do whatever they wanted with all of the
money they received. In other words, they could not be required to use it to
pay for health coverage.
The IRS's latest ruling, known as Notice 2015-17, which the tax agency says is
in sync with the most recent DOL policy on the matter, gives everyone time to
catch their breath.
Specifically, small employers with reimbursement plans in place will not be
penalized unless they maintain them beyond June 30 of this year. Employers
are also off the hook for having to file Form 8928, which is the form that
covers failures to satisfy group health plan requirements. Originally that form
would have to have been filed with employers' 2014 tax returns.
The reprieve also applies to plans that help retirees pick up the tab for
Medicare Part B and D premiums.
6. Employees with Sub S Corp Stock
Employees who own at least 2 percent of their employers' stock (if the
company is a Sub S corp) might come in for different treatment. Such
employees were required to report the premium reimbursement payments as
income on their 1040s, even though the payments were not subject to payroll
tax. But those same employees could also take a deduction equal to the
amount of that income, leaving them tax-neutral.
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