When President Obama signed into law the 21st Century Cures Act on December 13, 2016, most of the media coverage focused on the provisions related to medical innovation. But the law also includes some good news for small businesses that have been prohibited in recent years from providing their employees with Health Reimbursement Arrangements (HRAs). Specifically, as of January 1, 2017, qualified small employers can use HRAs to reimburse employees who purchase individual insurance coverage, rather than providing employees with costly group health plans. 

The need for HRA relief

Employers can use HRAs to reimburse their workers’ medical expenses, including health insurance premiums, up to a certain amount each year. The reimbursements are excludable from employees’ taxable income, and untapped amounts can be rolled over to future years. HRAs generally have been considered to be group health plans for tax purposes. 

The Affordable Care Act (ACA) prohibits group health plans from imposing annual or lifetime benefits limits and requires such plans to provide certain preventive services without any cost-sharing by employees. According to previous IRS guidance, “standalone HRAs” — those not tied to an existing group health plan — didn’t comply with these rules, even if the HRAs were used to purchase health insurance coverage that did comply. And businesses that provided the HRAs were subject to fines of $100 per day for each affected employee.

The IRS position was troublesome for smaller businesses that struggled to pay for traditional group health plans or to administer their own self-insurance plans. The changes in the 21st Century Cures Act give these employers a third option for providing one of the benefits most valued by today’s employees.

A new kind of HRA

The law incorporates an earlier bill known as the Small Business Healthcare Relief Act in creating an exception from the ACA penalties for “Qualified Small Employer Health Reimbursement Arrangements” (QSEHRAs). These HRAs won’t be treated as group health plans. Employees won’t be required to pay taxes on the employer’s contribution, nor will the employer be liable for payroll taxes on it.

QSEHRAs must satisfy the following requirements:

• The employer has fewer than 50 full-time employees, meaning it isn’t an “applicable large employer” subject to the employer shared-responsibility provision under the ACA.
• The employer doesn’t offer a separate group health plan to any of its employees.
• The HRA is provided on the same terms to all eligible employees, except that an employee’s benefit can vary based on criteria such as age and family size. 
• The HRA is funded solely by the employer, with no salary-reduction contributions.
• The HRA provides payment or reimbursement for medical care expenses, which can include individual health insurance as well as out-of-pocket expenses.
• The amount of payments and reimbursements don’t exceed $4,950 for individual employees or $10,000 for family coverage, subject to cost-of-living adjustments in future years. (The limits will be prorated for employees who aren’t covered by the HRA for an entire year.)

In addition, when an employer offers an HRA, all employees generally must be eligible unless they’re within their first 90 days on the job, under age 25, part-time or seasonal workers, covered in a collective bargaining unit, or certain nonresident aliens.  

Notice and reporting requirements

Employers that offer QSEHRAs must comply with some notice requirements. At least 90 days before each plan year begins (or on the first day a new employee is eligible), the employer must provide eligible employees a notice stating:

• The amount of the employee’s permitted benefit under the HRA for the year,
• That the employee should provide information about that amount to any Health Insurance Exchange to which the employee applies for advance payment of the premium assistance tax credit (also referred to as a federal subsidy), and
• That, if the employee isn’t covered under the minimum essential coverage for any month, the employee may be subject to tax under Internal Revenue Code Section 5000A for that month and reimbursements may be included in gross income.

Failure to provide timely notice will subject an employer to a $50 penalty for each employee, up to $2,500 annually. Notice will be considered timely for 2017 if provided by March 31, 2017.

In addition, employers must report the value of any QSEHRA benefit on employees’ Forms W-2, beginning with forms issued in January 2018 for 2017. Future IRS guidance on such reporting is expected.

Impact on employee subsidies

An employee’s eligibility for subsidies for individual insurance will be affected by his or her eligibility for a QSEHRA. If the QSEHRA makes health insurance “affordable” (meaning Silver-level coverage would cost no more than 9.69% of the employee’s household income), the employee won’t qualify for a subsidy. If the QSEHRA doesn’t make health insurance affordable, the employee can receive a subsidy but the amount will be reduced by the amount of the HRA benefit.

On the horizon

Although President-elect Trump and the Republican Congress have promised to repeal the ACA, the QSEHRA exception in the 21st Century Cures Act could complicate matters. If smaller employers take advantage of the exception, the individual insurance market is likely to expand and the risk pool is likely to diversify. This could both stabilize premiums and give more citizens a stake in preserving some of the ACA’s provisions. 

If you need guidance on your insurance or other benefits planning during this uncertain time, we can help.

Reporting requirements for ALEs

Reporting requirements for self-insured and smaller employers

Penalty relief for inaccurate reporting

Act now!

The reporting of employer expense reimbursements by employees will vary based on whether the employer reimburses under an accountable or nonaccountable plan. This article will briefly discuss the two types of expense reimbursement plans and what the tax consequences are for the employee. 

The Basics

To qualify as an accountable plan, the employer’s reimbursement arrangement must require all of the following:

1. The employee’s expenses must be connected to the business. This means that the employee must have paid or incurred deductible expenses while performing services as an employee. 
2. The employee must adequately account to the employer for the expenses within a reasonable period of time.
3. Any excess reimbursement must be returned to the employer within a reasonable period of time. 

On the other hand, nonaccountable plans are reimbursement arrangements that do not meet one or more of the requirements listed above.  For example, an employee who is reimbursed under an accountable plan, but fails to return, within a reasonable time, excess reimbursements. In this example, the excess reimbursements would be treated as if paid under a nonaccountable plan. In addition, if an employee is repaid for business expenses by reducing the amount reported as wages, it will be considered a nonaccountable plan. 

What is a Reasonable Period of Time? 

The IRS states that a reasonable period of time depends on the facts and circumstances of each situation. However, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time:

• Employee adequately accounts for expenses within 60 days after they were paid or incurred. 
• Employee returns any excess reimbursement within 120 days after the expense was paid or incurred. 
• Employee is given a periodic statement (at least quarterly) that asks the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the statement. 

What is Adequate Accounting?

The second requirement for an accountable plan says that the employee must adequately account to the employer for expenses. Examples of adequate accounting by the employee include providing the employer a statement of expense, account book, diary, or similar record in which the expense is entered at or near the time it was paid. The employee also must provide documentary evidence, like receipts, of travel, mileage, and other business expenses. 

It’s important to note that the employee must provide the employer with the same type of records and supporting information that would have to be provided to the IRS if the IRS questioned a deduction on the tax return. 

Tax Reporting

So why does it matter if your employer uses an accountable or nonaccountable plan? It matters because it affects how you will report the reimbursements and expenses for tax purposes. Expense reimbursements under accountable plans should not be included in box 1 wages on the employee’s Form W-2. In addition, as long as the expenses equal the reimbursements, the employee should not file Form 2106 to report employee business expenses nor claim a deduction. 

In the case of reimbursements under a nonaccountable plan, the employer will include the amount of reimbursements in box 1 wages on Form W-2. The employee must complete Form 2106 and itemize deductions to deduct business expenses. Only the business expenses greater than 2% of adjusted gross income will qualify for a deduction on Schedule A of Form 1040. 

Conclusion

Whether a reimbursement arrangement is an accountable or nonaccountable plan is determined based on whether the plan meets all three requirements of an accountable plan. While accountable plans have requirements that must be met, they could be viewed as more favorable to employees for tax reporting purposes. 

If you have questions about your expense reimbursement plan – as an employer or an employee – please contact us to discuss.

In an effort to help employers subject to the Affordable Care Act’s (ACA’s) information reporting requirements meet those obligations, the IRS has extended two important deadlines. Employers now have an additional two months to provide employees Form 1095-B, “Health Coverage,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.” 

Employers have an additional three months to file the forms with the IRS. Reporting to the IRS is done by using Form 1094-C, “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.”

Reporting requirements for ALEs

The ACA enacted Section 6056 of the Internal Revenue Code (IRC), which requires all applicable large employers (ALEs) — generally those with at least 50 full-time employees or the equivalent — to report to the IRS information about what health care coverage, if any, they offered to full-time employees. Employers generally must report this information no later than February 28 — or March 31 if filed electronically — of the year following the calendar year to which the reporting relates. 

Sec. 6056 also requires ALEs to furnish statements to employees that the employees can use to determine whether, for each month of the calendar year, they can claim a premium tax credit. The statements generally must be provided by January 31 of the calendar year following the calendar year to which the Sec. 6056 reporting relates.

Because of the deadline extension, however, for the 2015 calendar year, ALEs have until May 31, 2016, to file these information returns with the IRS (until June 30, 2016, if filing electronically). And they have until March 31, 2016, to furnish the employee statements. 

Bear in mind that this reporting is required even if you don’t offer health insurance coverage. And employers with at least 50 but fewer than 100 full-time employees or the equivalent who are eligible for the transitional relief from the employer shared-responsibility provision for 2015 must still comply with the information reporting requirements.

Reporting requirements for self-insured and smaller employers

Sec. 6055 of the IRC, also enacted by the ACA, requires health care insurers, including self-insured employers, to report to the IRS about the type and period of coverage provided and to furnish this information to covered employees in statements. The IRS’s extensions also apply to these deadlines: The 2015 calendar year information now must be reported by May 31, 2016, or, if filed electronically, June 30, 2016. Employee statements must be provided by March 31, 2016. 

Every self-insured employer must report information about all employees, their spouses and dependents who enroll in coverage under the reporting requirements for insurers. This reporting is required even for self-insureds not subject to the ACA’s employer shared-responsibility provisions or the ALE reporting requirements. Self-insured ALEs must comply with the insurer requirements in addition to the Sec. 6056 requirements. 

Further, non-ALE employers must comply with the Sec. 6056 requirements if they’re members of a controlled group or treated as one employer for purposes of determining ALE status. The employers that compose such a controlled-group ALE are referred to as “ALE members,” and the reporting requirements apply separately to each member. 

Penalties for noncompliance with reporting requirements

Failure to comply with the information reporting requirements may subject you to the general reporting penalty provisions. Penalties for information returns and payee (employee) statements filed after December 31, 2015, are as follows:

• The penalty for failure to file an information return generally will be $250 for each return (up from $100), not to exceed a calendar-year total of $3 million (up from $1.5 million).
• The penalty for failure to provide a correct payee statement will be $250 for each statement (up from $100), with a calendar-year maximum of $3 million (up from $1.5 million). 

Special rules apply to increase the per-statement and total penalties in the case of intentional disregard of the requirement to furnish a payee statement. Also, taxpayers with average annual gross receipts of no more than $5 million for the three preceding tax years are subject to lower maximum penalty amounts.

Don’t procrastinate!

Even with the extensions provided by the IRS, now is the time for affected employers to begin assembling the necessary information for Forms 1094 and 1095. The compliance obligation will likely require a joint effort by the payroll, HR and benefits departments to collect the relevant data.

If you have questions about complying with the ACA’s information-reporting requirements, don’t hesitate to contact us. We’d be pleased to help.

Applicable Large Employers (ALEs) must file Form 1095-C for each full-time employee and provide a copy to the employee. Although there is a transition period for determining which employers qualify as ALEs, in terms of this tax form, any employer with at least 50 full-time or full-time equivalent employees during 2015 will be required to file the form. As January 31 falls on a Sunday in 2016, a copy of the form must be provided to each full-time employee by February 1, 2016. If paper filing, a copy of Form 1095-C for each employee must be filed with the IRS by February 28, 2016. If filing electronically, a copy must be filed by March 31, 2016. Copies filed with the IRS must be accompanied by transmittal Form 1094-C. An automatic 30-day extension for filing the forms with the IRS is available by submitting Form 8809. 

Please note, small employers do NOT need to file Form 1095-C.

Health insurance providers, including employers with self-insured health plans must file Form 1095-B for each covered employee and provide a copy to the employee. It’s important to note that these forms must be completed without regard to the number of employees. As January 31 falls on a Sunday in 2016, a copy of the form must be provided to each covered employee by February 1, 2016. If paper filing, a copy of Form 1095-B for each covered employee must be filed with the IRS by February 28, 2016. If filing electronically, a copy must be filed with the IRS by March 31, 2016. Copies filed with the IRS must be accompanied by transmittal Form 1094-B. An automatic 30-day extension for filing the forms with the IRS is available by submitting Form 8809.
 

For additional information, please click here to see our article published June 1, 2015.

With open enrollment for employer benefits coming up, now is the perfect time to consider opening a Health Savings Account (HSA). An HSA is a great opportunity for eligible individuals to lower their out-of-pocket health care expenses and federal tax bill. But before you sign-up, there are a few things you should know about this option.

Am I eligible to open an HSA?

There are a few requirements for obtaining the benefits of an HSA:

• HSAs are available to individuals who carry health insurance with a deductible of at least $1,300 for single coverage or $2,600 for family coverage. And it’s okay if the insurance plan doesn’t impose any deductible for preventive care, such as annual checkups.
• HSAs are not available to individuals who receive Medicare benefits or are claimed as a dependent on another person’s tax return.

Where can I open an HSA?

An HSA can generally be set up at a bank, an insurance company, or other institution the IRS deems suitable as long as it’s established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses

How much can I contribute to an HSA?

Eligible individuals under age 55 can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. Individuals age 55 or older by the end of the tax year for which the HSA contribution is made can contribute up to $1,000 more. The contribution for a particular tax year can be made as late as April 15 of the following year.

Are my employer’s contributions to my HSA also tax exempt?

Employer contributions to an employee’s HSA are exempt from federal income, Social Security, Medicare, and unemployment taxes.

What can I pay for with my HSA?

HSA funds can be used to cover qualified medical expenses for the account beneficiary, their spouse, and dependents not covered by health or dental insurance such as co pays for doctor’s visits, prescriptions, and laboratory fees. However, health insurance premiums don’t qualify. (Click here for more examples).

Can I withdraw my HSA funds for non-qualified expenses?

HSA distributions that are not used for qualified medical expenses are included in your gross income and subjected to an additional 20% penalty tax.

What happens to my HSA funds if I don’t use them all in a year?

If you make contributions to your HSA account and do not need to spend the entire amount contributed during the year on your qualified medical expenses, the balance in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phase-out rules, so HSAs are available to high-earners and low-earners alike.

How can I deduct my HSA contributions on my taxes?

The deduction for your contributions to an HSA can be claimed on Page 1 of your tax return after completing IRS Form 8889, Health Savings Accounts (HSAs). The deduction is claimed in arriving at adjusted gross income; thus, eligible individuals can claim the benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.

The Employer Shared Responsibility Provisions of the Affordable Care Act (“ACA”) went into effect for tax year 2015. If you haven’t already started doing so, we wanted to provide you with some guidance on what information an applicable large employer should be tracking monthly and reporting annually to help you meet reporting requirements for 2015.

Overview of the Employer Shared Responsibility Provisions

Before going into too much new detail, it’s important to briefly review the employer mandate. Applicable large employers are required to comply with the Employer Shared Responsibility Provisions beginning in January 2015. For 2015, a company must employ 100 full-time and full-time equivalent employees to be considered an applicable large employer. That amount reduces for 2016 down to 50 full-time and full-time equivalent employees. Companies meeting these thresholds are required to offer minimum essential health coverage to at least 70% of full-time employees and their dependents to be compliant. In 2016 and thereafter, the percentage increases to 95% of full-time employees and their dependents.

For a more in-depth discussion of the Employer Shared Responsibility Provisions and a brief discussion of how to calculate full-time and full-time equivalent employees, please see our article published December 13, 2014, "Employer Shared Responsibility Provisions of the ACA are in Effect for 2015."

Information to Track Monthly

During 2015, applicable large employers need to track whether they offered full-time employees and their dependents minimum essential coverage that meets the minimum value requirements and is affordable. They also need to track whether their employees enroll in the minimum essential coverage that was offered by the employer. It is important to track this information because an employer could be subject to an employer shared responsibility payment if either:

• The employer offered coverage to fewer than 70% (95% for 2016 and later) of full-time employees and their dependents, and at least one full-time employee enrolled in coverage through the Health Insurance Marketplace and receives a premium tax credit; or
• The employer offered coverage to at least 70% (95% for 2016 and later) of full-time employees and their dependents, but at least one full-time employee receives a premium tax credit because the coverage offered was not affordable, did not provide minimum value, or the full-time employee was not offered coverage.

New Reporting Requirements

The ACA requires that applicable large employers file information returns with the IRS as well as provide statements on healthcare coverage to full-time employees. Reporting this information was voluntary for 2014, but in 2015, all applicable large employers are required to file the reporting forms. It is important to note that the reporting requirements apply to ALL applicable large employers starting in 2015. This means that if your business has 50-99 full-time employees in 2015, and therefore qualifies for transition relief from the employer mandate because you have less than 100 full-time employees, you will still be required to file the forms for 2015.

Form 1095-C: “Employer-Provided Health Insurance Offer and Coverage”

Applicable large employers must provide Form1095-C to full-time employees. In addition, a copy of the form is filed with the IRS as an information return. This form is used by the IRS to help determine whether full-time employees are eligible for the premium tax credit, and it also helps determine if a business may potentially owe an employer shared responsibility payment. The following information is required to complete Form 1095-C:

• List of who is a full-time employee for each month.
• Identifying information for each employee such as name, address, and social security number.
• Information about the health coverage offered by month.
• List of the months the employee was enrolled in the company’s health coverage.
• The employee’s share of the monthly premium for lowest-cost self-only minimum value coverage.

Form 1094-C: “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns”

Form 1094-C is filed as a transmittal document for Forms 1095-C, serving as a summary of the totals from Form 1095-C much as a Form W-3 serves  as a summary of the totals from Form W-2. This form is used by the IRS to help determine whether an employer is subject to a shared responsibility payment and the payment amount.

Conclusion

The Employer Shared Responsibility Provisions of the ACA contain many new requirements for filing. In order to be compliant with the reporting requirements, an employer must first determine whether it will be considered an applicable large employer subject to the ACA mandate. If determined to be an applicable large employer, the next step will be to track information monthly on the health coverage offered and the employees participating in the health plan. This information is critical for applicable large employers to be able to provide the required information to their employees and the IRS.

For more information…

See our website for helpful charts, previously published articles, and the required IRS filing forms.

On February 18, 2015, the Internal Revenue Service issued Notice 2015-17, which reiterates the conclusion in previous guidance addressing employer payment plans – that they are not in compliance with the Affordable Care Act (ACA). This article will discuss the additional guidance provided by Notice 2015-17, and it will also serve as an update to the article that Stockman Kast Ryan & Co. published on December 15, 2014 linked here:

https://www.skrco.com/what-the-affordable-care-act-means-for-reimbursement-type-plans/

Transition Relief for Small Employer Reimbursement Plans

Notice 2015-17 states that employer payment plans, (plans that pay directly for or reimburse employees in part or full for health insurance) are considered group health plans that are not in compliance with the Affordable Care Act. However, the Notice does provide transition relief to small employers – those who are not Applicable Large Employers, meaning that they have less than 50 full-time or full-time equivalent employees. Small employers have until June 30, 2015 to transition their plan to one in compliance with the Affordable Care Act or be subject to excise tax under Internal Revenue Code §4980D. The excise tax is equal to $100 per day, per employee, or $36,500 per participant, per year.  

The transition relief applies to:

1.Employer payment plans, as described in Notice 2013-54 (http://www.irs.gov/pub/irs-drop/n-13-54.pdf);

2.S Corporation healthcare arrangements for 2-percent shareholder-employees;

3.Medicare premium reimbursement arrangements;

4.TRICARE-related health reimbursement arrangements (HRAs).

S Corporation Guidance for 2% Shareholder-employees

Notice 2015-17 provides that the IRS is still contemplating publication of additional guidance on the application of market reforms to a 2-percent shareholder-employee healthcare arrangement. The good news for taxpayers is that until this guidance is issued, and in any event through the end of 2015, these arrangements will not be subject to the excise tax under Internal Revenue Code §4980D. In addition, S corporations with a 2-percent shareholder-employee healthcare arrangement will not be required to file Form 8928. Keep in mind that this relief does not apply to S corporation employees who are not 2-percent shareholders.

As discussed in the December article, the market reforms do not apply to a group health plan with less than two participants. For this reason, a plan covering only a single S corporation employee is not subject to the market reforms or the excise tax.

Medicare Reimbursements

Arrangements that reimburse employees for Medicare Part B or Part D premiums are considered employer payment plans under IRS Notice 2013-54. Notice 2015-17 discusses that when an employer reimburses the cost of Medicare premiums and integrates this with another group health plan offered by the employer, then this is permissible under the market reforms.

 However, this is permissible only if:

1.The employer offers a group health plan (other than the Medicare reimbursement arrangement) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;

2.The employee participating in the Medicare reimbursement arrangement is actually enrolled in Medicare Parts A and B;

3.The Medicare reimbursement arrangement is available only to employees who are enrolled in Medicare Part A and Part B or Part D;

4.The Medicare reimbursement arrangement is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medicare premiums.

Employee Reimbursement

Notice 2015-17 confirms the argument that an employer may increase an employee’s taxable compensation, not conditioned on the purchase of health insurance, without creating an employer payment plan.  Because this type of arrangement will not be considered a group health plan, it is not subject to the market reform provisions.

Unfortunately, the IRS has clarified that after-tax employer payment plans are, in fact, subject to excise tax under Code §4980D. An arrangement where an employer pays for or reimburses an employee for the cost of health insurance is subject to the market reform provisions of the Affordable Care Act without regard to whether the employer treats the money as pre-tax or post-tax to the employee.

Conclusions

The market reform provisions of the Affordable Care Act are continuously updating and taking shape as more guidance is received on the application of these rules from the IRS. Notice 2015-17 contains some important clarification on the employer reimbursement arrangements as well as transition relief through June 30, 2015 for some small employer plans. We will continue to update you as new information and guidance becomes available.

Medical Reimbursement Plan and HRA Basics

New ACA Rules

Penalties

More than 2% S Corporation Shareholder/Employees

Exceptions for Some Plans

Conclusion

The Individual Shared Responsibility Provisions

Minimum Essential Coverage

Health Insurance Premium Assistance Refundable Credit

Exemptions from Requirement for Health Coverage

Payments Required for Noncompliance with the Individual Shared Responsibility Provisions

New Tax Forms and Reporting Required for Individual Shared Responsibility Provisions

Conclusion