Small Employers Maybe Healthcare Excise Tax

If you’re a small employer — in other words, an employer that isn’t an “applicable large employer” under the health care law — and you reimburse or pay premiums for individual health insurance policies for employees, be aware that you may be subject to a $100 per day per employee excise tax. This adds up to $36,500 per year.

There was transition relief from this excise tax but it ended on June 30, 2015.

Business Group Calls for Repeal

The National Federation of Independent Business (NFIB) is calling for Congress to repeal the excise tax on small employers that reimburse workers for health insurance premiums.

“It’s hard to believe Congress or the President intended to punish employers much more severely for actually helping their workers,” said NFIB Policy Director Kevin Kuhlman.

“Nevertheless, that’s the consequence and most small businesses don’t know it,” he added.

According to NFIB research, 14 percent of small businesses that don’t offer group health insurance reimburse their employees for premiums. “They think they’re doing a good thing but they are walking into a minefield,” the NFIB stated.

Background on Expired Relief for Small Employers

As noted in IRS guidance (Notice 2013-54), small employers that offer their employees health coverage through arrangements that constitute an “employer payment plan” owe an excise tax (under Internal Revenue Code section 4980D) if they fail to comply with provisions involving market reforms. This tax was added as part of the Affordable Care Act (ACA).

If a health coverage arrangement fails to satisfy the market reforms, an employer may be subject to a $100 per day excise tax per applicable employee. However, since the Small Business Health Options Program (SHOP) Marketplace was still evolving, and the transition by eligible employers to this coverage or other alternatives would take time to implement, the IRS offered some relief. Specifically, the relief provided that the excise tax wouldn’t be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for, individual health policy premiums or Medicare part B or Part D premiums. (IRS Notice 2015-17)

This relief rule applied for 2014 for employers that weren’t applicable large employers for that year, and for January 1 through June 30, 2015 for employers that aren’t applicable large employers for 2015.

After June 30, 2015, such employers are generally liable for the excise tax.

What’s an “Applicable Large Employer?”

For this purpose, an applicable large employer generally is, with respect to a calendar year, an employer that employed an average of at least 50 full-time workers (including full-time equivalents) on business days during the preceding calendar year.

In determining whether an employer was an applicable large employer:

  • For 2014, an employer can determine its status by referencing a period of at least six consecutive calendar months — as chosen by the employer — during the 2013 calendar year.
  • For 2015, an employer can determine its status by referencing a period of at least six consecutive months — again, chosen by the employer — during the 2014 calendar year.

In other words, an employer can choose six months rather than the entire 2013 and 2014 calendar years.

The IRS stated that the relief doesn’t extend to stand-alone health reimbursement arrangements or other situations where employers reimburse employees for medical expenses other than insurance premiums.

Medicare Premium Reimbursement

The IRS also provided in Notice 2015-17 that an arrangement under which an employer reimburses (or pays directly) some or all of Medicare Part B or Part D premiums for employees constitutes an employer payment plan. If such an arrangement covers two or more active employees, it’s a group health plan subject to the market reforms. An employer payment plan may not be integrated with Medicare coverage to satisfy the market reforms because Medicare coverage is not a group health plan.

Take Proactive Steps

If you have questions about the excise tax or about how your organization is affected by the Affordable Care Act, contact your tax and payroll advisers. The law contains many complex provisions. Proactive employers that take the right steps can protect themselves.