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ACA Section 4980D Penalties Apply to Large and Small Employers

By Aaron P. Borden on August 19, 2015

Internal Revenue Code section 4980D imposes a $100.00 per day per employee excise tax on any employer that fails to meet certain group health plan requirements. In testimony before the Senate Finance Committee, a policy analyst with the National Federation of Independent Business testified that 18 percent of small businesses are engaged in practices that may subject the employers to the $100.00 per day per employee penalty.

The Department of Labor issued an FAQ identifying three arrangements which may fail to meet certain group health plan requirements. First, employers reimbursement of employees for the employees' purchase of individual policies (on a pre- or post-tax basis) is a group health plan and can trigger penalties under section 4980D. Second, employers offering high-risk employees the choice between enrollment in group health coverage or cash can trigger penalties under section 4980D. Third, employers providing a section 105 reimbursement plan that allows employees to select individual policies through an outside vendor can trigger penalties under section 480D.  

Earlier this year, the IRS issued Notice 2015-17 reiterating that the arrangements described above may fail to meet certain group health plan requirements; and, as a result, the employers  may be subject to the excise tax under section 4980D. However, in the same guidance, the IRS provided temporary relief for small employers. The excise tax is not applicable to employers for 2014 if the employers were not an applicable large employer in 2014, and it is not applicable to employers for January 1 through June 30, 2015 if the employers are not applicable large employers for 2015. After June 30, 2015, the section 4980D excise tax may be applicable to any employer providing group health coverage to its employees under an arrangement that does not meet the group health plan requirements.

In Notice 2015-17, the IRS recognized that there is uncertainty regarding the applicability of section 4980D excise tax to S corporations’ reimbursement of premiums for individual health insurance covering 2-percent shareholders. Until additional guidance is issued, the section 4980D excise tax will not be applicable to S corporation's reimbursement of premiums for individual health insurance covering 2-percent shareholders.

Notice 2015-17 also confirms that there is an easy end-around to avoid section 4980D excise taxes on reimbursement arrangements. Employers may increase employees' compensation, so long as the additional compensation is not conditioned on the purchase of health coverage, and such an arrangement will not be subject to excise tax under section 4980D.

Noncompliant employers must self-report the section 4980D excise tax on Form 8928. However, the IRS and the Department of Labor guidance state that reimbursing employees for purchasing individual coverage "can" or "may" subject an employer to liability under section 4980D without detailing exactly when such an arrangement DOES subject an employer to liability under section 4980D. Given this uncertainty, employers should consider seeking legal counsel regarding the employer’s liability for excise tax under section 4980D.