February 10, 2015
Major tax changes for both businesses and individual taxpayers were effective for the 2014 tax year under the Affordable Care Act.
For individuals, there is a mandate requiring minimum essential health coverage; tax credits are available for health insurance premiums for coverage obtained on a Marketplace Exchange. These two tax items are determined on a monthly basis separately for each taxpayer, spouse, and dependent claimed on a tax return for the tax year.
The IRS has developed information reporting broken down by month and individual to support tax return preparation. Some of this reporting was mandatory for the 2014 tax year, and some of it was optional for 2014 and becomes mandatory for the 2015 tax year.
For small businesses, the IRS has yet to provide clear guidance to employers who reimburse employees for individual health policy premiums, or to S Corporations and partnerships with similar arrangements for more than 2% shareholders and partners. However, informal conversations with representatives at the IRS have provided some insights into their treatment of these health reimbursement arrangements.
Responsibilities under the Individual Mandate
Starting for the 2014 tax year, taxpayers, their spouses, and their dependents were required to have minimum essential health coverage for the tax year in order to avoid making a payment under the individual mandate. In addition, if anyone in the taxpayer’s family was enrolled in coverage through a Marketplace Exchange during any portion of the tax year, the taxpayer may have qualified for a premium tax credit.
Reporting required in 2014
If you purchased insurance via the Marketplace Exchanges, you should have received a copy of Form 1095-A, Health Insurance Marketplace Statement starting for the 2014 tax year. The form was sent to the person identified at enrollment who was expected to file a tax return, and who would claim the premium tax credit for the year of coverage for the tax household if requirements were met. For individuals who obtained coverage through a Marketplace Exchange, Form 1095-A showed coverage. In addition, if the Exchange granted an exemption from the individual mandate, an exemption certificate was sent to the taxpayer, which will need to be retained with his or her tax records.
Reporting required in 2015
Optional for the 2014 tax year, and mandatory for the 2015 tax year, insurers (including sponsors of self-insured employer plans) that provide minimum essential coverage to an individual during a calendar year must send a copy of Form 1095-B, Health Coverage, to the person identified as the responsible individual named on the form. The statement must be furnished on or before January 31 of the year following the calendar year the coverage is provided. Form 1095-B is useful in establishing minimum essential coverage. Note that insurers providing coverage through a Marketplace Exchange will provide Form 1095-A instead.
Also, optional for the 2014 tax year, and mandatory for the 2015 tax year, large employers subject to the employer mandate must furnish a copy of Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to each of its full-time employees by January 31 of the year following the year to which the Form 1095-C relates. Note that large self-insured employer plans will report on Form 1095-C rather than Form 1095-B. Form 1095-C is useful both for the employer mandate as it shows coverage, and for the premium tax credit as the form shows the employer did not offer minimum essential coverage or there were affordability issues.
Going forward, these forms should be retained as part of every taxpayer’s tax records. They need to be watched for and kept, just like any Form 1099 or W-2.
How the law affects employers
Small Businesses with fewer than 50 employees (about 96% of all employers): Under the Affordable Care Act, companies that have fewer than 50 employees are not required to provide coverage or fill out any forms in 2015, or in any year, under the Affordable Care Act.
Larger employers with 100 or more employees (about 2% of employers): The overwhelming majority of these companies with 100 or more employees already offer quality coverage. Today’s rules phase in the percentage of full-time workers that employers need to offer coverage from 70 percent in 2015 to 95 percent in 2016 and beyond. Employers in this category that do not meet these standards are required to make an employer responsibility payment for 2015.
Employers with 50 to 99 employees (about 2% of employers): Companies with 50-99 employees that do not yet provide quality, affordable health insurance to their full-time workers must report information regarding their workers and coverage in 2015, but have until 2016 before any employer responsibility payments apply.
Health reimbursement arrangements
The IRS has informally advised that, from a technical perspective, even if an employer has added premium reimbursements to an employee’s gross wages in 2014, the employer is still considered to have created a non-compliant group health plan, which is a violation of the market reforms of the ACA. Non-compliance could result in an excise tax of $100 per day per reimbursed employee.
However, from a practical perspective, as long as the employer was unaware of the impermissibility of the reimbursement, and once made aware, added the reimbursements to gross wages for 2014, the IRS has informally indicated that this will be deemed sufficient compliance for 2014.
For 2015 and beyond, once on notice that they cannot reimburse employees for individual plan premiums, employers may not merely adjust the W-2 for additional gross wages and continue reimbursement. Any increase in gross wages cannot have a direct link to the individual’s health plan premiums (that is, the employer cannot require documentation of the existence of the health plan, or provide payments to the employee or the health plan directly for premium amounts).
This practical approach allows an employer to correct any non-compliance issues on a prospective basis, and avoid the implications of the $100 per day per reimbursed employee excise tax imposed by the ACA.
There are situations where reimbursement is acceptable under ACA, and could be considered non-taxable as wages to the employee. For example, if the reimbursing employer has its own group health plan and an integrated health reimbursement arrangement, and the employee receiving reimbursement has obtained his coverage under another employer’s group health plan (such as a spouse’s group coverage), the premium reimbursement will not be considered a violation. Care should be taken to ensure that both parties do not receive pre-tax treatment for the same health insurance premium.
Also note that the market reforms that disqualify reimbursements described above do not apply to a group health plan that has fewer than two participants. This means that one participant health reimbursement arrangements are still allowed under the ACA.
Not all types of insurance premiums are eligible for reimbursement, so careful consideration is needed before paying an employee for individual policies. For example, Medicare is not considered a group health plan, and so reimbursement of Medicare premiums is not possible.
S Corp shareholders and Partners in partnerships
Guidance is still being considered by the IRS in this area. The current direction given is to continue to treat premiums paid for more than 2% shareholders in S Corps (and their spouses and dependents if applicable) as W-2 wages at the S Corp level, with the self-employed health insurance premiums deducted by the shareholder on Form 1040. Premium payments made by or on behalf of partners in a partnership should also continue to be treated as they have in the past. Currently, such reimbursements will not be treated as violating ACA.
If you have any questions related to these tax forms or your responsibilities under the Affordable Care Act, please call our office. We will be happy to assist you.