New Legislation Overrides Draconian IRS Penalties on Small Employers that Reimburse or Pay for Employee Health Insurance Premiums

On December 13, 2016, Pres. Obama signed into law the “21^st Century Cares Act.”  Part of that legislation allows small employers to provide qualified health reimbursement arrangements (HRAs) for employees.  When the Affordable Care Act (ACA) was enacted, the long-time practice of allowing employers to pay for a limited amount of employee medical expenses, including health insurance premiums, on a tax-free basis was rendered non-compliant.  The ACA required these HRAs to be integrated with a group health insurance plan meeting the ACA mandate, such as no annual limit on the amount of benefits provided.  Large employers, meaning those with 50 or more full-time equivalent employees, are required by the ACA to offer minimum essential and affordable group health insurance to their full-time employees.  Small employers are not required to offer group health insurance, but many want to provide some financial assistance to their employees who want to select their own individual health insurance plans.  The financial assistance was provided under so-called “stand alone” HRAs which the ACA rendered non-compliant.  Small businesses that continued these stand-alone HRAs were threatened by the IRS with $100 per day per employee penalties ($36,500 a year per employee) under IRS Notice 2015-17.  Under the Notice, such small businesses had to stop the practice by June 30, 2015 (with a special rule for one-employee S corporations).  Thus, even though small employers aren’t subject to the mandate to offer group health insurance, they could be put out of business by the government for offering to help pay for the individual health insurance plans of their employees!  The penalty was a way of strong-arming small employers to enroll employees in the government run Small Business Health Options Program (SHOP) marketplace exchange.

This government nonsense is finally dealt with by the 21^st Century Cares Act which is applicable to HRA plan years beginning after 2016.  To avoid the $100 per day per employee penalty after 2016, small employers must now render any financial assistance through a qualified small employer HRA which meets these requirements:

1.      The employer must have less than 50 full-time equivalent employees.

2.      The employer must not offer group health insurance to any employee.

3.      All eligible employees must receive the same terms under the HRA, although variances based upon age or the number of family members is permitted (much like the pricing of a health insurance policy).  Excluded employees are those who haven’t completed 90 days of service, who haven’t attained age 25, who are part-time or seasonal workers, or who are part of a union.

4.      Only employer funds may be used to fund the HRA and no employee salary reduction contributions are permitted.

5.      The HRA either pays or reimburses the employee’s eligible medical expenses, and if health insurance premiums are paid or reimbursed, the employee must first submit proof of insurance coverage.  If the HRA permits, employee family member expenses can also be reimbursed.

6.      The maximum HRA benefit is limited to $4,950 for self-only plans, or to $10,000 for HRAs that also provide reimbursement for family members of the employee.  These amounts are adjusted for inflation after 2016.  If an employee isn’t covered for the full year, then these amounts must be prorated by the number of months covered.

7.      The amount of the benefit must be reported as information on the employee’s W-2.  Under a new provision, if the employee does not have minimum essential health insurance for the month in which the medical care is provided, then the HRA reimbursement is taxable compensation and is not tax-free.

8.      A written notice must be given to employees not later than 90 days before the beginning of the HRA plan year or else there is a $50 per employee per failure penalty (not to exceed a maximum $2,500 for a calendar year).  For the first HRA year beginning in 2017, the notice isn’t treated as late if given no later than 90 days after enactment, which is March 13, 2017.  The notice must state the amount of the employee’s permitted benefit, that the employee must inform any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit of the amount of HRA benefit, and that the employee may be subject to penalty if he or she does not comply with the mandate to purchase minimum essential health insurance coverage.
UPDATE:  IRS Notice 2017-20 suspends the March 13th notification date for 2017 plans until 90 days after further guidance has been issued by the IRS.

The new law removes the penalty for HRA plan years beginning before 2017 for any small employer that failed to stop providing the old style HRA as of June 30, 2015.  It appears that the penalty will apply after 2016 if small employers don’t follow the new qualified HRA rules.

A change is also made for purposes of the premium assistance tax credit for employees purchasing health insurance on an exchange when they also participate in a qualified HRA.  The premium assistance credit is reduced by the amount of HRA benefit.  This provision prevents double dipping where the employee receives both a government subsidy and an employer subsidy for purchasing health insurance on the government exchange.

Interesting 2016 Tax Return Due Dates

While we wait for our elected national leaders to do something responsible with our tax laws, let's look ahead to some interesting 2016 tax return due dates.

·        The tax filing season will officially begin on January 23, 2017.  That is when the IRS will officially begin accepting electronic and paper tax returns.

·        A new tax law requires the IRS to hold tax refunds arising from the earned income tax credit or from the additional child tax credit until at least February 15, 2017, in an attempt to cut down on tax fraud.  Practically, the tax refunds will not be available until the week of February 27th.

·        The April 15, 2017 due date falls on Saturday this year.  Normally, the due date would be the Monday following, but that Monday is a Federal holiday for the District of Columbia (Emancipation Day) so the actual due date is Tuesday, April 18, 2017 for filing 2016 federal individual, trust, and C corporation income tax returns.  The various states will have their own due dates.  Utah’s due date will follow the federal due date.  The April 18th due date is also effective for filing Form 4868 for an automatic six-month extension.  The extended due date is October 16, 2017, because October 15th falls on Sunday.

·        As noted above, the C corporation 2016 tax return due date has been changed to April 18, 2017 from the normal March 15, 2017 due date.  However, the six-month extension period has been shortened to five months, leaving the normal extended due date at September 15, 2017.  UPDATE:  For 2016 C corporation tax returns, the IRS has used its regulatory authority to grant a 6-month filing extension period despite the statute's 5-month limit.  S corporation tax returns are still due March 15, 2017 and the S corporation extension period remains six months.

·        A very important change affects 2016 partnership tax returns.  The due date is now March 15, 2017 instead of April 18, 2017.  In addition, the normal five-month extension period has been lengthened to six months.  But with the shortened original due date, the extended partnership due date remains September 15, 2017.  The Utah 2016 partnership tax return due date stays on April 18, 2017 under HB39.

·        Another change affects the federal trust tax return extension period.  The extension period for 2016 trust income tax returns is lengthened to five and a half months from five months, making the extended due date October 2, 2017 (since September 30^th falls on a Saturday) instead of September 15, 2017.

·        Still another very important change affects the Foreign Bank Account Report (FBAR, FinCen 114) 2016 due date.  The FBAR is now due at the same time the individual income tax return is due.  In a news release dated December 16, 2016, FINCEN announced that the 2016 FBAR is due April 18, 2017 instead of June 30th.  In addition, unlike past years, the FBAR may now be extended to the individual income tax return extended due date.  In the announcement, FINCEN stated that automatic extensions to October 15th would be granted for those failing to meet the April deadline without the filing of any forms or extension requests.  The announcement indicated that the extended due date is October 15, 2017.  Since the FBAR due date is tracking the individual income tax return due date, it is possible that the automatic extended due date will actually be October 16, 2017, and indeed the IRS confirms the October 16th extension date on its website.

·        Forms 1099 and W-2 have typically been due to payees by January 31^st and remain so for the 2016 forms.  However, the due date for submitting the forms to the government has changed to January 31, 2017 from the normal due date of February 28^th (for paper-filed forms) or March 31^st (for electronically-filed forms).