Affordable Care Act Whammy: Changing Health Insurance Premium Tax Rules

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Watch out!  The Affordable Care Act (ACA) has wrought a drastic change for all employers providing pre-tax benefits through reimbursement or payment of insurance premiums for employees’ individual heath plans.

For over half a century, employers have been able to offer pre-tax health insurance benefits to their employees, either  (a) by paying for health insurance group plans or (b) by paying for the employees’ premiums, deductibles, and co-payments for their individual plans.  Thanks to the IRS’ and Department of Labor’s recent regulatory implementation of the ACA, however, the second option has been completely eliminated. Consequently, starting in 2014, any benefits paid by employers to employees to cover their individual health insurance premiums or other reimbursement of health insurance costs will no longer qualify as pre-tax benefits.  Instead, the financial value of such benefits will be fully taxed for income and FICA purposes.  This change in the law is not limited to employers with fifty or more employees, as many of the initial notices regarding the application of the ACA had implied. 

What if any relief can be sought?  A few options are available, although they may be challenging for smaller organizations. 

The first option is to get a group insurance plan, for which the premiums will be tax-free to the employee.  With a group plan in place, employers can additionally offer pre-tax health reimbursement benefits to employees if desired, such as for co-payments, co-insurance, and deductibles.   Alternatively, this additional benefit may be offered to an employee whose spouse is covered by a group plan maintained by the spouse’s employer.

The second option is to pursue broader pre-tax benefit opportunities for employees, such as through a cafeteria plan.  Such a plan effectively allows employees to pick and choose from a “menu” of available health-related benefits, with cash in lieu of benefits being one of the choices.  The downside has the expense involved in setting up such a benefits plan, which must be in writing, involves complex legal compliance requirements, and typically requires the assistance of a benefits consulting firm.   Given these realities, now may be the time to promote good will and care for one’s employees, through the establishment of expanded health and other employee-related benefits.  

Federal District Court Judge Holds Clergy Housing Allowance Exemption Unconstitutional

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As of last week, religious institutions and the clergypersons who serve them have been put on notice:  Subject to appeal, a Federal statute that provides an exemption for the housing allowance for clergy members has been held unconstitutional.  For now, the holding affects only clergy who receive cash compensation for a housing allowance, not clergy who reside in a parsonage or other accommodations provided for the convenience of the employer.

Religious Liberty and Same-Sex Marriage: Colliding Freedoms?

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On November 5, 2013, the Illinois legislature became the next government body to approve of same-sex marriage, following the United States Supreme Court’s recent invalidation of the federal definition of marriage as being between a man and a woman. The Illinois bill is expected to become law upon Governor Quinn’s signature. 

Mandatory Employer Notice for Health Care – Upcoming Deadline

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While most small nonprofit organizations (less than 50 employees) are not required to offer health care coverage to employees under the Patient Protection and Affordable Health Care Act (“the Act”) all employers are required to comply with the Act’s notice requirements.  The deadline is October 1, 2013 – right around the corner! 

Nonprofit organizations may satisfy the Act’s notice requirements simply by distributing one of the two model notices on the United States Department of Labor’s website.  One version is for employers who do not offer any health care plan, and the second version is for employers who offer a health care plan to some or all employees.

Notices must be provided to all current employees, as well as to all later hired employees.  Failure to comply with the notice requirement could result in fines as much as $100 per employee, per day of noncompliance. 

“Reasonable Compensation”: Lessons From IRS’ 2013 College and University Report

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Last week, the IRS released its final 37-page compensation report (“Report”), based on its five-year compliance review of 400 randomly selected colleges and universities.   The Report reflects the IRS’ increasing willingness to scrutinize public charities, particularly their comparability data used to set executive compensation.  Consequently, even though colleges and hospitals generally represent the largest and most complex of tax-exempt organizations under IRC Section 501(c)(3), the legal compliance concerns raised are worth a careful review by all tax-exempt public charities with employees.

IRC Section 4958 requires public charities to pay no more than reasonable compensation to their officers, directors, trustees, and key employees.  In the event an organization provides unreasonable compensation, significant excise taxes can be imposed on the recipients of the compensation and potentially on the board members and others who approved it.

What is reasonable or unreasonable compensation? Section 4958 provides a “safe harbor” margin for organizations that follow a three-step process:

Does ObamaCare Apply to My Nonprofit?

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Start counting—employees, that is.  The federal Patient Protection and Affordable Care Act of 2010, which is well known as "ObamaCare," imposes "pay or play" requirements on certain employers.  Essentially, they must either provide minimum levels of health insurance coverage or pay monetary penalties for non-coverage.  These requirements apply only to employers with at least 50 "full-time equivalent" employees.  Consequently, many smaller employers need not be concerned about compliance with ObamaCare.


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