IRS Reprieve on Health Insurance Premium Tax Penalties

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On February 28, 2015, the Internal Revenue Service issued Notice 2015-17, providing temporary transitional relief for employers that offer pre-tax reimbursement or payment of premiums, deductibles, and co-payments to multiple employees for their individual health individual plans.  By way of background, the Affordable Care Act (ACA) wrought a drastic change for all employers providing such pre-tax benefits.  Despite such long-standing practice, the IRS and U.S. Department of Labor eliminated this option as part of its implementation of the ACA, making such benefit fully taxable to employees of all employers (not just employers subject to the ACA, based on having more than fifty full-time employees).

Thanks to this reprieve, employers will neither be required to pay otherwise applicable “market reform” excise penalties of $100 per employee (per day!), nor file accompanying IRS Form 8928 for legal noncompliance.  The applicable time period is from January 1, 2014 through June 30, 2015.  (Notably, the excise tax penalties do not apply to one-participant health plans, or for certain other benefits such as long-term care.)  Employers thus should not include such employee benefits in their employees IRS Form W-2s for such time periods.  Likewise, employees are not required to report such benefits as taxable income.   

What should responsible nonprofit employers do?  With respect to tax year 2014, employers should make sure that their IRS Form W-2s are accurate and do notinclude such health insurance benefits as taxable income.  Amended W-2s thus may be warranted.  Correspondingly, employers may wish to inform affected employees not to report such benefit as taxable income on their Form 1040s (or to amend their already filed returns accordingly).

With respect to 2015 and onward, it may be best to wait and watch for new legal developments.  On the other hand, this may be a good time to switch over to a group health insurance plan, to the extent they are affordable.  Another option beyond tax benefit considerations is for employees to become members of a health care sharing arrangement such as offered by Samaritan Ministries (www.samaritanministries.org). These health care sharing organizations appear be steadily growing, providing a cost-effective health insurance alternative for many families and individuals.

The regulatory reprieve is hugely welcome, but unfortunately does not provide much comfort for tax planning purposes since the temporary relief is effective only for a few more months.  According to the Evangelical Council for Financial Accountability and other sources, however, this employee tax issue is gaining traction within the halls of Congress, At least one bill has been proposed to eliminate the tax change – the Small Business Healthcare Relief Act (HR 5860).  Bigger changes may be afoot for the ACA, as both Congress and the US Supreme Court are currently grappling with different aspects of its legality and potential reform.