Selections from the IRS’ Year End Guidance on Affordable Care Act Issues

The IRS issued Notice 2015-87 in the middle of December and Notice 2016-4 at the end of December.  They provide guidance on a variety of complicated issues pertaining to the ACA.  A few of these issues to take note of are: 

1.     Health reimbursement accounts (HRAs) are written plans where an employer agrees to reimburse certain health care costs of employees.  Such reimbursements are income tax free to the employee.  Except in a C corporation scenario, the tax-free nature of the reimbursements is not generally available to owner-employees.  Stand-alone HRAs are no longer permitted by the ACA unless they reimburse only excepted benefits.  Benefits excepted from the ACA’s market reform rules include dental or vision coverage.  If the HRA reimburses other health care costs such as co-pays or deductibles, the HRA must be integrated with a qualifying group health insurance policy.  If it is not, the employer is subject to a $100 per day per employee penalty, generally capped at $500,000 per year per entity.

2.     An HRA that covers fewer than two current employees is not subject to the ACA’s marketplace reform rules.  In this circumstance, the HRA can cover any health care cost and avoid the $100 per day penalty.

3.     The IRS clarified a fine point relating to HRAs that are integrated with a group policy.  The HRA loses its integration if the arrangement reimburses individuals not covered by the group policy.  For example, if an employee chooses self-only coverage, the HRA may not reimburse the health costs of the employee’s spouse and/or dependents because they are not covered by the group health insurance policy.  The IRS offers transition relief that ignores this violation through 2015 to give time for employers to come into compliance.

4.     The ACA requires applicable large employers to offer “affordable” health insurance to full time employees or face a penalty.  The law states that an employee’s share of the group policy premium must not exceed 9.5% of household income to be deemed affordable.  Because an employer will not know an employee’s household income, the IRS has provided several safe harbors to determine affordability.  One safe harbor is 9.5% of the employee’s W-2 compensation.  The 9.5% rate is adjusted for inflation.  For 2015 the percentage is 9.56% and for 2016 the percentage is 9.66%.

5.     An applicable large employer will be penalized for failing to offer health insurance if at least one full-time employee obtains health insurance on the exchange and receives a premium tax credit.  The penalty amount is $2,000 times the total number of full-time employees in excess of 30 (80 for 2015).  The penalty amount is indexed for inflation.  For 2015 the penalty is $2,080 and for 2016 the penalty is $2,160.

6.     An applicable large employer will also be penalized for failing to offer health insurance that is “affordable” or failing to at least meet the “bronze” level of benefits if at least one full-time employee obtains health insurance on the exchange and receives a premium tax credit.  The penalty amount is $3,000 times the number of full-time employees receiving such credits.  The penalty amount is indexed for inflation.  For 2015 the penalty is $3,120 and for 2016 the penalty is $3,240.

7.     In Notice 2015-87 the IRS states that it will not impose penalties on employers who make good faith efforts to comply with the ACA’s information reporting requirements for 2015 but who nevertheless make inaccuracies in the tax forms or miss the due date.  The penalty is up to $250 per form up to a maximum of $3 million!  In Notice 2016-4 the IRS extends the due dates for 2015 reporting.  Applicable large employers are now required to provide Form 1095-C by March 31, 2016 (instead of February 1, 2016) to employees and to file Form 1094-C by May 31, 2016 if filed on paper (instead of February 29, 2016) or by June 30, 2016 if filed electronically (instead of March 31, 2016) with the IRS.
There is no penalty waiver for failure to meet the due date unless there is reasonable cause for the failure.  Normally an extension of time should be requested.  However, for the 2015 Forms 1095-C and 1094-C the IRS has extended the due dates beyond the normal extended due dates.  Therefore, the IRS states that it will not grant any extension of the new 2015 due dates, but it will consider reasonable cause for late filing.  Factors taken into account for establishing reasonable cause include whether the employer made reasonable efforts to gather and transmit the necessary data to an agent to prepare the data for submission to the IRS and whether steps are being taken to ensure that the employer will be able to timely comply with next year’s reporting requirements.

8.     Now that the IRS has extended the ACA information reporting due dates, some individuals will file their 2015 income returns before receiving their ACA tax forms.  If such individuals have relied upon other information received from employers, or from health insurance providers, they will not be required to amend their income tax returns once they receive their Forms 1095-B or 1095-C, including any corrected forms.  However, the IRS has not extended the due dates for the Health Insurance Marketplace (or Exchange) to issue Form 1095-A.  Individuals who enrolled for coverage through the Marketplace should receive Form 1095-A by February 1, 2016 and should wait to file their tax returns until they receive their Form 1095-A.