Last Minute IRS Penalty Relief for Small Employers That Pay Individual Policy Premiums for Employees

On February 18, 2015, the IRS issued a notice to retroactively waive the $100-per-day-per-employee market reform penalty for small employers who reimburse or pay premiums for individual health care policies for their employees.  Although the relief may create favorable savings for both small employers and their employees, the late notice provided by the IRS adds another level of complexity and frustration to an already burdensome issue. Affected employers include:

  • Small employers (less than 50 full-time and full-time equivalent employees) who directly pay or reimburse individual health insurance premiums for employees from January 1, 2014 through June 30, 2015.
  • S corporations that reimburse or directly pay individual health insurance policy premiums for over 2% shareholders.

These employers may need to amend their payroll returns and employee Forms W-2 in order take advantage of the retroactive removal of the market reform penalty.

 

PREVIOUS GUIDANCE

Under previous guidance, the IRS, Department of Labor (DOL), and Department of Health and Human Service (HHS) stated that employer reimbursement arrangements designed to assist employees with individual health insurance premiums and out-of-pocket costs were a violation of provisions established by the Affordable Care Act (ACA). Accordingly, IRS regulations required that these arrangements be terminated and converted to taxable compensation. If not terminated, these arrangements could subject an employer to a substantial excise tax (i.e. penalty) of $100 per-day-per-employee.

 

PENALTY RELIEF GUIDANCE 

The new IRS notice waives the excise tax described above for 2014 and the first part of 2015 (January-June) for small employers that pay or reimburse their employees for individual health insurance premiums. Additionally, employers that pay or reimburse employees for Medicare Part B or D premiums or TRICARE-related expenses will not be subject to the penalties with regard to those benefits, provided certain conditions are met.

 

GUIDANCE ON PAYMENT OF 2% S CORPORATION SHAREHOLDER’S INDIVIDUAL INSURANCE PREMIUMS 

The IRS has also released guidance for S corporations that pay or reimburse 2% shareholders for premiums for individual health insurance policies. Based on previous guidance, there has been uncertainty about how arrangements to reimburse 2% shareholders for premiums should be treated. The new notice provides that until additional guidance is issued, at least through calendar-year 2015, the IRS will not assert the excise tax with regard to a health care arrangement of a 2% employee.

 

OUR RECOMMENDATIONS

HBE advises small employers (less than 50 full-time and full-time equivalent employees) that taxed reimbursements to employees for health insurance premiums in 2014 to consider amending payroll returns and Forms W-2 to reflect the new rules.

If HBE prepared your entity’s 2014 Forms W-2, our Client Accounting Team will review your Forms W-2 for possible amendments, which could result in revisions to employee Forms W-2. We recommend that you notify affected employees who received taxable reimbursements that there may be a change to their Form W-2.

 

—— GENERAL EXAMPLE OF POTENTIAL TAX SAVINGS ——

Compensation Scenario:

  • Monthly Health Insurance Premium Cost: $275
  • Annual Taxable Compensation: ($275 x 12 months) = $3,300

Applying the new, temporary IRS relief guidelines to the scenario shown above may result in the following tax savings:

Tax Type Savings Description
Employee FICA (7.65%) $ 252.45 Refund to be issued by the IRS to the employer on amended payroll returns; amount would be due from the employer to the employee.
Employer FICA (7.65%) $ 252.45 Refund to be issued by the IRS to employer on amended payroll returns.
Employee Income Tax (20%) $ 660.00 Savings to be realized by the employee on their individual tax return (assuming 15% Federal & 5% state marginal tax rate).
Total Estimated Savings $1,164.90  

 

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If an employee has already filed their Form 1040 based on a previously issued W-2, they may be able to amend their 2014 tax return to reduce the taxable wage amount based on the corrected Form W-2.

Should you have any questions, please contact our office at (402) 423-4343. As always, our team of trusted advisors is here to help.

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