Reimbursing Employees for Health Premiums Could Trigger ACA Penalties– February 25, 2015 by Maura Corrigan

Q. "I’m a small business owner with fewer than 50 employees. I do not offer health insurance coverage for my employees, but I do reimburse them for their substantiated health insurance premium payments. I normally deduct the reimbursement on my taxes and my employees receive a tax-free fringe benefit. Is this practice putting me at risk of a penalty under the Affordable Care Act?"

A. Beginning very soon, yes.

In 2013, the IRS released Notice 2013-54 indicating that this type of an arrangement was generally an “employer health plan” under the Affordable Care Act. The bottom line was that the employer was not allowed to make reimbursement without including the reimbursement in the employee’s compensation; otherwise, the employer was subject to an excise penalty tax of $100 per day. If the employer was not complying with the rules under this notice, they would be required to file form 8929 (Return of certain Excise Taxes Under Chapter 43 of the IRC) and pay the penalty.

In Notice 2015-17, the IRS is providing transitional relief to small employers (50 or fewer employees). The notice provides that the excise tax will not be asserted for reimbursement under this type of arrangement for calendar year 2014 AND for the first six months of 2015. But that’s as far as the forgiveness goes. You have a reprieve for now but must start complying effective July 1, 2015, by including such amounts in taxable compensation subject to employment withholding. Otherwise, you will be subject to this penalty.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Maura Corrigan at mcorrigan@cohencpa.com or a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.