ACA payment reimbursed by employer

[ILLMAS]

Let's say it was cheaper for the employer to reimburse employees for their share of ACA, instead of the company getting a group insurance.  Employee A does his tax return and because his income was low he qualifies for a subsidy and gets of a refund (ACA refund), this would be considered double dipping in my eyes and the employee should return the refund to the employer or not claim the subsidy, correct???   But is there a way of informing the IRS an employee is getting a reimbursement to prevent him/her of milking the system?

 

Thanks

 

 

Edit: I believe I found the answer, but I will wait to see what other say before I post it. 

[Jack from Ohio]

Any payment made to an employee in lieu of health insurance must be considered Box 1, 3 & 5 taxable income.  The employee may deduct premiums he pays on Sch. A. 

 

These payments do NOT nor CANNOT be considered as healthcare insurance provided by the employer.

[SaraEA]

A lot of confusion about the ACA hinges on ignorance of one critical fact:  It does not apply to employers with less than 50 employees.  So if a small business employer wants to help his 10 employees out with the cost of their health insurance, it goes in Box 1 of their W2 as earned income.  They can deduct the full cost of their insurance on Sch A if they exceed the 10% haircut.  No one is doing anything wrong. 

[ILLMAS]

Here is what I found:

 

In the past, employers were able to reimburse employees the cost of their individual coverage, on a tax-free basis per Internal Revenue Code §106. Since federal subsidies are now available for individual coverage purchased through the Health Insurance Marketplace, federal agencies do not want employers to incentivize employees to purchase individual coverage. Therefore, substantially identical guidance was issued by the IRS, Notice 2013-54, and the DOL, Technical Release 2013-03. Under this guidance, as of January 1, 2014, employers will violate the ACA and be subject to excise taxes ($100 per day per employee) if they provide tax-free reimbursement to employees or allow pre-tax salary reductions through a cafeteria plan to pay for individual coverage.

 

The reasoning within the guidance is that “employer payment plans” are considered group health plans under ERISA when the reimbursement is tied to the employee’s other health insurance coverage. Group health plans are now subject to ACA reforms and cannot have annual dollar limits for essential health benefits. Therefore, since premium reimbursement plans cover essential health benefits and include an annual dollar limit, they may violate the ACA.

 

Note that taxable reimbursements conditioned on the purchase of individual coverage also create a group health plan with dollar limits in violation of the ACA. However, taxable payments forwarded to insurers for individual coverage may be permissible if (1) the employee is given the choice to receive the cash or have the payment applied to individual coverage and (2) the arrangement meets ERISA’s definition of a voluntary plan. To meet this definition, the employer cannot endorse or contribute towards the cost of coverage.

 

Group health plans that provide retiree-only coverage or “excepted benefits” are not subject to ACA reforms. Excepted benefits include plans that are limited to dental/vision coverage if offered separately from the group medical coverage. These plans can have dollar limits and can continue to be reimbursed on a tax-preferred basis.

 

In summary, in order for an employer payment or reimbursement plan to be in compliance with the ACA:

 

Employers cannot:

Reimburse or pay for a current employee’s individual coverage on a tax-free basis.

Allow employee pre-tax salary reductions for the cost of individual coverage.

Pay for or reimburse an employee’s individual coverage on a taxable basis.

Employers can:

Provide a Health Reimbursement Arrangement (HRA) to reimburse former employees (retirees) on a tax-free basis for their group or individual coverage. Due to IRS double-dipping rules, the HRA cannot reimburse for coverage that is paid for with pre-tax dollars.

Provide an HRA to reimburse current employees on a tax-free basis for other group coverage (retiree, COBRA), as long as the HRA is integrated with a group health plan. Due to IRS double-dipping rules, the HRA cannot reimburse for coverage that is paid for with pre-tax dollars.

Provide a stand-alone HRA to reimburse on a tax-free basis for dental/vision coverage or expenses.

Provide cash-back for waiving group health coverage offered through a cafeteria plan.

Allow employees to elect to reduce their pay and have post-tax payroll deductions sent to the insurer.The employer must not endorse or contribute to the plan.

Please note that HRAs create a group health plan with other compliance implications, including COBRA, ERISA, and ACA reforms.

[TAXMAN]

So if I read this right. Employer with less than 50 employees is rules as always was. or am I dreadfully wrong?

[Jack from Ohio]

So if I read this right. Employer with less than 50 employees is rules as always was. or am I dreadfully wrong?

They escape the employer mandate for providing insurance.  The escape the mandate for providing1095-C if they do provide insurance.

 

No.  Not "rules as always."

 

Employees are still under the rules that require them to have insurance.  If not, then the "Shared Responsibility" tax is imposed.

 

I can see that there is a huge amount of non-information in the tax professional world.

 

Am I the only one that was proactive and came up to speed in the previous 2 years?

[RitaB]

 

Am I the only one that was proactive and came up to speed in the previous 2 years?

 

Yes.  You are.  I can't wait for the %^&*$% thing to be repealed.

 

Obamacare architect Jonathan Gruber bragging about deceiving the American people.  I think we paid him about $400,000 to do it, too:

 

[Jack from Ohio]

Yes.  You are.  I can't wait for the %^&*$% thing to be repealed..

Total repeal is a fairy tale.  The idea of total repeal has been touted in political circles as "what the country really needs."  While I agree with that premise, there is a snowballs chance in Hades that it will be totally repealed.  This was made to be reality with the outcome of the 2012 elections.

 

If you are planning your training based on the idea that you may not need to deal with it, it is time for a reality check.  ACA will be a part of our lives for at least 10 more years.  This, again, as a result of the 2012 elections. 

 

Maybe I take the definition of "tax professional" to have a different definition than most.  I have been answering ACA questions from my clients for over a year.  I can feel confident that I am giving correct answers.

 

Rant over!

[RitaB]

Don't worry. And rant all you like. I'll apply the rules in place on the day I prepare the return or get the question. That healthcare.gov was actually working the other day when I got a question.  Read it straight from the horse's mouth and sent the client a snapshot just in case it changed the next day.

 

And you're right, repeal is a strong word.  But I sure hope for change.

[RitaB]

Yes.  You are. 

 

  /s

 

Sorry, I keep forgetting to do that.

[Catherine]

I must admit I've been ignoring it, under the heading that here in MA we've had a mandate for some years so I didn't think it would affect me much.  No questions from ANY client - individual or corporate - on the law.  A couple of folks who either get MA-subsidized coverage or who skip it (really can't afford it) and we appeal the penalty each year and win.  I do have CPE scheduled on this -- maybe even this weekend.  Hmm... I had better check my calendar on that!

 

Rita - am with you on repeal.  Jack - am with you on the unlikelihood of that.  It was a stupid decision back in the 40's to give businesses a tax break for providing insurance to employees; it caused the whole industry to grow up around this employer-sponsored model, back when most folks (=men, mostly) worked for ONE employer their whole lives, retired at 65 and died by 67.  Plus the exemption from the Sherman-Clayton Acts in the medical field as a whole, and we end up decades later with a government-sourced mess.  Blech.  

[RitaB]

I  I do have CPE scheduled on this -- maybe even this weekend.  

 

I haven't decided between TheTax Book CPE and APlusCPE.  Anybody have any feedback on either of those as it pertains to ACA?  I used APlusCPE last year and really liked it.  Buy the The TaxBook every year, but have not used their CPE yet.

[Jack from Ohio]

Most of the solid information I received came from the IRS Nationwide Tax Forums 2013 & 2014.  Classes were done by IRS people in those departments. 

 

Money well spent, for me anyway.

[mcb39]

I, also, did the online IRS ACA webinar and just finished attending two days of accredited IRS Tax Learning.  A great deal of time and effort was spent on ACA and the consensus of the IRS reps is that this will be the most difficult tax prep year EVER!  In truth, they aren't even sure that they understand it and there will be no telephone assistance available.  You either learn it or find the answers online.  They don't want phone calls and have heavily reduced the numbers of their employees.  They want you to use their website; which leaves many of us in a terrible predicament.  If it were not for this Community board; we would be lost in never-never land.  Thank you so much Eric.  Thank you to all participants who ask and answer the right questions.  FWIW, I have earned my AFSP designation until someone chooses to file a lawsuit and shoot that down. 

 

I am intending and hoping to address each client on a one by one basis in regard to the ACA.  There are so many ifs, ands and buts; I don't see any other way to do it.  I have plenty of reference material now, unless there are indeed changes before filing begins.  The IRS is also projecting that to be some time in February (tentatively).  This entire system leaves us all on very thin ice.  Without each other, we would surely fall through.

[grmy2h]

So if I read this right. Employer with less than 50 employees is rules as always was. or am I dreadfully wrong?

IMO - wrong..... Under the ACA, the IRS issued Notice 2013-54 that said this could no longer be done on a pre-tax basis (whether the employer was reimbursing the employee’s own private insurance or insurance purchased the exchange), even if the employer is otherwise exempt from the ACA due to having fewer than 50 full-time employees.

 

If the employer does not provide group health coverage to any employees and instead uses a reimbursement plan, it is considered a health plan. And under the ACA, there is a $100 a day excise tax imposed on employers who sponsor group health plans that fail to meet the annual limit and preventive care requirements.

[Catherine]

I think I'm going to go whimper for a while, now...

[mcb39]

I think I'm going to go whimper for a while, now...

 

That is an excellent idea and something that many of us will be doing from time to time.  The complications and off-sides of this thing are way more than I ever dreamed.  They told us to allow from 30 to 45 minutes extra with each client in order to ask and document all of the questions and answers.  It is times like this when I wonder what ever made me think that I was capable of doing this job.

[SaraEA]

"Under the ACA, the IRS issued Notice 2013-54 that said this could no longer be done on a pre-tax basis (whether the employer was reimbursing the employee’s own private insurance or insurance purchased the exchange), even if the employer is otherwise exempt from the ACA due to having fewer than 50 full-time employees."  grmy2h

 

Key words here are "PRE TAX."  A business with under 50 employees does not have to offer health insurance but is free to give employees extra money to help them buy their own.  The payment goes in Box 1 of the W2, just like any other wages or bonus.

 

The kink here is that the extra money can't be conditioned on the employee using it for health insurance.  "Note that taxable reimbursements conditioned on the purchase of individual coverage also create a group health plan with dollar limits in violation of the ACA." ILLMAS  So I guess a small employer can give employees $300 a month extra pay, report it on their W2 and deduct it on the employer return as wages, just so long as s/he doesn't insist it be used for health insurance.

 

Are we getting this yet?  Will we ever get it?  Does the IRS get it?

[grmy2h]

Key words here are "PRE TAX."  A business with under 50 employees does not have to offer health insurance but is free to give employees extra money to help them buy their own.  The payment goes in Box 1 of the W2, just like any other wages or bonus.

 

Are we getting this yet?  Will we ever get it?  Does the IRS get it?

Pre-tax or after tax, the penalty still applies.

 

http://www.calt.iastate.edu/article/updated-health-reimbursement-plans-not-compliant-aca-could-mean-exorbitant-penalties

 

A snippet of the article, for those that don't click links....

 

Employer Alternatives and New Department of Labor Guidance

On November 6, 2014, the Department of Labor issued new Q & A's restricting employers' choices beyond the restrictions made evident by Notice 2013-54. According to the Q & A, an employer cannot give an employee cash to purchase insurance coverage on the individual market, even if the employer treats the cash as wages, withholding income tax and FICA/FUTA taxes. Essentially, the Department has directed employers to stay out of the health insurance arena completely unless purchasing group health plans for their employees. Notice 2013-54 had specified that employers could forward post-tax payments to private health insurance companies at the request of their employees for the purchase of the employees' individual health insurance. The Notice referred to this as a "payroll practice" that was still acceptable. The most recent Q & A (reprinted here) clarifies that this "payroll practice" exception is very narrow.

 

Q1: My employer offers employees cash to reimburse the purchase of an individual market policy. Does this arrangement comply with the market reforms?

 

No. If the employer uses an arrangement that provides cash reimbursement for the purchase of an individual market policy, the employer's payment arrangement is part of a plan, fund, or other arrangement established or maintained for the purpose of providing medical care to employees, without regard to whether the employer treats the money as pre-tax or post-tax to the employee. Therefore, the arrangement is group health plan coverage within the meaning of Code section 9832(a), Employee Retirement Income Security Act (ERISA) section 733(a) and PHS Act section 2791(a), and is subject to the market reform provisions of the Affordable Care Act applicable to group health plans. Such employer health care arrangements cannot be integrated with individual market policies to satisfy the market reforms and, therefore, will violate PHS Act sections 2711 and 2713, among other provisions, which can trigger penalties such as excise taxes under section 4980D of the Code. Under the Departments' prior published guidance, the cash arrangement fails to comply with the market reforms because the cash payment cannot be integrated with an individual market policy.

[Catherine]

So, as the post just above Debbie's said, the employees get the cash and can use it for whatever they want.  If they choose to use it to buy health insurance, that's their choice.  As long as it isn't tied to insurance cost or made conditional... basically they all get a raise and spend it on whatever.  And it goes on the W-2.

[Jack from Ohio]

So, as the post just above Debbie's said, the employees get the cash and can use it for whatever they want.  If they choose to use it to buy health insurance, that's their choice.  As long as it isn't tied to insurance cost or made conditional... basically they all get a raise and spend it on whatever.  And it goes on the W-2.

Yes

[grmy2h]

The question I still have is... May an S corporation reimburse its S corporation shareholders for health insurance premiums outside of a group health plan? Do the same rules preventing this reimbursement to regular employees apply to S corporation shareholders? Does this now become subject to FICA, if reimbursed?

 

I haven't been able to find a definitive answer? Opinions?

[RitaB]

The question I still have is... May an S corporation reimburse its S corporation shareholders for health insurance premiums outside of a group health plan? Do the same rules preventing this reimbursement to regular employees apply to S corporation shareholders? Does this now become subject to FICA, if reimbursed?

 

I haven't been able to find a definitive answer? Opinions?

 

My understanding is, to avoid the discrimination penalties, they'd have to reimburse the expenses for every employee:

 

http://evergreensmallbusiness.com/s-corporations-health-insurance-and-obamacare/

 

http://www.calt.iastate.edu/article/updated-aca%E2%80%99s-thorny-impact-more-2-s-corporation-shareholders

 

 

So, if they are going to pay (as opposed to reimburse tax free) the health insurance of the shareholder, the amount would be in box 1 of shareholders W-2, but not boxes 3 and 5.  So, health benefits paid to, or on behalf of, shareholders still not subject to SS and MC.  Also, note that they spell "health" incorrectly.

 

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues

 

"Treating Medical Insurance Premiums as Wages

Heath and accident insurance premiums paid on behalf of the greater than two percent S corporation shareholder-employee are deductible and reportable by the S corporation as wages for income tax withholding purposes on the shareholder-employee’s Form W-2.

These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 and 5 of Form W-2."

[ILLMAS]

Another component of the ACA to keep an eye out for, PPACA:

 

 

Although employers can be forgiven for focusing on the more pressing elements of the Patient Protection and Affordable Care Act (PPACA) that take effect in January 2014, there is another provision of the law that is not yet getting much attention—and it should.

The provision is a short one. Fully insured health plans that have not retained grandfathered status under the PPACA will be subject to the same nondiscrimination rules that have long applied to self-insured plans. The penalties warrant notice, as they are considerable and could cost employers up to $500,000 if they don’t comply with the provision.

The new provision also has implications for benefits strategy. “Historically, if an employer wanted to offer [certain employees or owners] medical coverage that was different, richer or received a greater subsidy, the solution was always to offer insured plans because they weren't subject to the same nondiscrimination rules as self-insured plans,” said Andy Anderson, a partner at law firm Morgan, Lewis & Bockius in Chicago. “Now that historic calculus has been changed by the [PPACA].”

Expanding Nondiscrimination

Like the nondiscrimination rules for self-insured health plans, cafeteria benefit plans and various retirement plans, the PPACA provision is designed to penalize companies that discriminate in favor of highly compensated employees when it comes to offering certain benefits—in this case, fully insured health plans. This discrimination can take the form of favoring highly compensated employees when it comes to eligibility to participate in the plan or in terms of the benefits provided. In general, highly compensated employees meet any of the following criteria:

• A shareholder who owns more than 10 percent of the company.
   
• An individual who is among the five highest-paid employees in the organization.
   
• An individual who is among the top 25 percent of employees in terms of compensation.

Once the federal government starts enforcing the provision, employers could face an excise tax of $100 for each day the plan is not in compliance for each non-highly compensated employee who is not eligible for the health plan, up to a maximum penalty of $500,000.

Anderson noted that the biggest difference between these PPACA nondiscrimination rules and the nondiscrimination rules for other types of benefits lies in the penalty calculation. In short, the penalties for noncompliance under the PPACA are calculated based on the number of people who are discriminated against. For example, a business with 100 employees that offers a discriminatory fully insured health plan for 10 highly compensated employees would pay a penalty based on the 90 employees who are facing discrimination. “That is the exact opposite of how nondiscrimination rules have been historically considered,” Anderson explained. “In a self-insured arrangement the tax consequences are based on discriminatory coverage received by the highly paid individuals.”

When to Comply?

The key question is, when will the federal government release the guidance necessary for employers to comply with the provision? “Apparently, [issuing this guidance] is not a huge priority in Washington right now,” observed Bonita Hatchett, a partner at law firm Barnes & Thornburg in Chicago. The IRS postponed enforcement of the provision at the end of 2010, noting that employers need guidance on exactly how these rules should apply to fully insured plans. Since then, there has been little indication of when this guidance might arrive.

Seeing as there are already nondiscrimination rules for self-insured and cafeteria plans, Anderson speculates that “regulators will attempt not only to make sense of rules in the PPACA, but perhaps they will attempt to synthesize all of those [nondiscrimination] rules so that they begin to operate in a more consistent way.”

Whatever the final result, it is unlikely that guidance will be released in the near future, given the flurry of regulations being issued as we move closer to 2014. The IRS has said it will hold off on enforcement until that guidance has been released, which may be in 2014 or even 2015.

Preparing for Guidance

Although the timing of forthcoming guidance is a question mark, the nature of the issue is not. “Most employers have a pretty good idea whether they have any potential discrimination issues lurking in their health plan structures,” Anderson said. “They might only offer health coverage to a limited number of people. They may offer free health coverage only to executives or owners.”

The point of the nondiscrimination provision is to ensure that everyone is eligible for the same benefits. To make sure their organizations are prepared when guidance comes out and enforcement begins, HR and benefit managers should do the following:

• Take a close look at current plans. The first step is to take an inventory of fully insured health plans that the organization currently offers. In addition, as employers develop and execute their 2014 compliance approach, they should make sure that any new health plan design is not discriminatory.
   
• Know who is highly compensated. “Employers should always know who is highly compensated and who is not,” said Hatchett. In fact, businesses may already keep that information for retirement plan testing purposes.
   
• Keep nondiscrimination rules in mind when hiring. If the organization is recruiting an executive or any other individual who could meet the highly compensated criteria, employers need to tread carefully when offering or designing any type of special health insurance arrangement for that individual. “If employers want to continue offering special benefits for executives, they should try to do so in a tax-neutral way,” Anderson advised.
   
• Be prepared to act when the time comes. Even if employers do not want to change potentially discriminatory plans right now, they should be aware of the issues. If they address these proactively, they can avoid a rush to comply once the guidance is released. More important, they will have time to communicate the issues and any resulting changes to the affected employees.

Joanne Sammer is a New Jersey-based business and financial writer.

Related External Articles: 

White House Delays Nondiscrimination Rules Under PPACA (or At Least Said It Would), Fox Rothchild LLP, January 2014

- See more at: http://www.shrm.org/hrdisciplines/benefits/articles/pages/nondiscrimination-rules-health-plans.aspx#sthash.5PUeQSfB.dpuf

[Jack from Ohio]

"Treating Medical Insurance Premiums as Wages

Heath and accident insurance premiums paid on behalf of the greater than two percent S corporation shareholder-employee are deductible and reportable by the S corporation as wages for income tax withholding purposes on the shareholder-employee’s Form W-2.

These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 and 5 of Form W-2."

It is taxable in boxes 1, 3 & 5.  Employee can then deduct premiums on Sched A.  Employee could also purchase HDHP insurance and establish an HSA for the tax benefits. 

 

Any money paid to the employee in lieu of the company providing insurance must be included on the W-2 as taxable income.

 

This is effective starting Jan. 1, 2014.  We are 10 1/2 months into this law change.