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Tax planning for small business excise tax penalties under IRC 4980D

July 9, 2015

Tax professionals are looking for the best way to approach clients in this environment of uncertainty surrounding new excise taxes for small business health plans. The excise tax affects two types of plans: 1) those that use individual health insurance, and 2) those that reimburse employee out-of-pocket expenses (often called an “HRA”). Those who say nothing could risk exposure to liability if the penalty stays as part of the law. Those who react to correct their health plans might wind up wasting time and money if the excise tax is removed. A CPA asked . I posted this message in response to an inquiry about a discussion on what defensive strategy I would suggest to a small business client The original discussion was in the NJ CPA forum but I thought that it might enjoy wider interest here.

I just saw that Kiplinger Tax Letter July 2, 2015 edition says “So if the Service does not grant relief, it’s a safe bet that taxwriters will do so”. So that seems like a citable source of opinion for offering a tax risk management plan. Based on that, we might discuss a three-pronged planning approach with our small business clients:

1) The probability that the Service will act proactively to amend Notice 2013-54 to prevent passage of Grassley/Boustany bill.

2) The probability of the Grassley/Boustany bill becoming law as proposed.

3) The likelihood that undocumented Health Reimbursement Arrangements won’t stand up to any examination and won’t be protected under any safe harbor or extension provisions.

So a risk management discussion might involve: a) accounting for employer-paid individual health insurance as a taxable bonus for now with the possibility of adjusting wages before the year end (no harm done), b) a review of health plan benefit plan documents (a smart precaution under any circumstances) and c) a plan to delay modification of HRA plan designs until clarification is available. 

The problem I see ahead with the proposed solution is that small group insurers will balk (they may withdraw products), employers with 50+ employees will complain at the discriminatory treatment and legislators will be scared about the public cost of more small business employers dumping employees onto the insurance exchanges if they pass legislation easing the path to this strategy.

More information is likely to follow. But let’s not forget that as the law reads today many small businesses are exposed to that $100 per employee per day excise tax that was considered necessary to maintain the integrity of ACA’s health care reform measures. And no matter what, take this opportunity to review and update your employee health plan documents.

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