Recent reports indicate 90 percent of employersare seeing increases on their health insurance renewals this year. Not surprising, but the more troublesome figure is that 25 percent of these increases are in the double digits.
To state the obvious, businesses need an alternative to address the increasing costs and restrictive participation requirements that make traditional group health insurance out of reach for most small businesses.
A commonsense solution is to reimburse employees for their individual health insurance. Employees have already purchased an individual health plan, they like their coverage, and an employer contribution would be greatly valued.
Somebody you respect – your CPA, your weekend golf buddy, or an acquaintance in your professional network – has advised you against giving employees money for their individual insurance.
“Your business will be fined up to $36,500… per employee!” they say.
That figure is no chump change. It’s a large sum of money for any business, let alone a business unable or unwilling to take the financial plunge into traditional group insurance.
The purpose of this article is to provide perspective on this $36,500 figure, and to provide more information on the reality of the fee than what has been published to date.
The Core Issue
The core issue is really a financial issue with roots that stretch far deeper than an IRS excise tax – it’s about questioning the status quo of traditional group health insurance. A status quo that has dominated the health insurance industry since World War II. We’re talking giant sequoia tree roots in Redwood National Park, not the sapling maple tree you just bought from Home Depot and stuck in your front yard.
It’s likely, almost certain, that we will look back at this article soon and find the thought of employer fines for helping employees with health insurance to be ludicrous (no need to look backward for me).
But before we get there, let’s dive into this seemingly daunting $36,500 figure a bit deeper.
Group Health Plans Aren’t New…and Neither is the Tax
The term “group health plan” is broad; it includes many types of employer-provided benefit plans such as traditional group health insurance, self-insured plans, and any other plan that provides medical care for participants or their dependents either directly through insurance or reimbursement.
Most private sector group health plans are covered by the Employee Retirement Income Security Act (ERISA). Among other things, ERISA provides protections for participants and beneficiaries in employee benefit plans, including providing access to plan information. Also, individuals who manage these plans must meet certain standards of conduct and plan requirements. Many of these requirements are documented under 26 U.S. Code Chapter 100. A failure to meet these requirements could lead to excise tax penalties that could be assessed according to “26 U.S. Code § 4980D – Failure to meet certain group health plan requirements”.
An employer’s plan to provide employees money for individual health insurance(whether taxable or tax-free) is considered a group health plan. Since that plan is a group health plan, it must meet the requirements of Chapter 100. If it doesn’t, the plan could be subject to penalties upon audit.
Code 4980D isn’t new – it was there before the Affordable Care Act (ACA) – and employers providing these types of group health plans (money toward individual insurance and/or out of pocket medical expenses) had to comply then. These employer plans have to comply now. Was anybody in the industry talking about the $36,500 penalty before ACA? Of course not. It didn’t make headlines because employers weren’t being fined. Were they being audited? Odds say yes. Were there noncompliant plans audited pre-ACA? Odds say almost undoubtedly yes. Were there fines levied on businesses for these audited noncompliant plans? Not that I’m aware of.
So, why the big deal now?
Because we’re in a time of change. The ACA added new requirements to Chapter 100, sometimes called the “Market Reforms,” that are covered in detail here. These requirements were effective for all plans beginning January 1, 2014 or later.
$36,500… The Reality
So, let’s say you’re a business owner that gives or reimburses 10 employees $304/month for their individual insurance (we’re making our math easy later). In order to receive the money, employees are required to provide proof of insurance coverage – like an invoice or billing statement. For purposes of our example, all this can be done formally or informally, although it should be noted that informal reimbursement/payment of employees’ individual insurance coverage isn’t recommended.
This example company, whether intentional or not, offers a group health plan to its employees. Is the business at risk of being fined $36,500 per employee? Maybe.
Let’s take a minute to go through the “what-if’s”:
1. Your plan is audited – There are approximately 30 million small businesses in the U.S. and yours could certainly be one of the handful selected for audit by the Department of Labor (DOL). ACA reporting and new compliance requirements have resulted in far greater DOL scrutiny of ERISA plans than in years past.
2. Your plan is found to be out of compliance – A plan could be noncompliant for a variety of reasons: requirements related to portability and access, standards relating to benefits for mothers and newborns, and now these pesky “Market Reforms.” So let’s say it was out of compliance for some reason.
3, The compliance failure was due to reasonable cause and/or your company/plan didn’t exercise willful neglect – Basically, you weren’t trying to intentionally circumvent the law and were exercising reasonable diligence. One law dictionary’s definition of reasonable diligence: A fair, proper, and due degree of care and activity, measured with reference to the particular circumstances; such diligence, care, or attention as might be expected from a man of ordinary prudence and activity.
4. You’re granted a correction period and don’t correct the error within 30-days – There’s a 30-day correction period that starts from the time the person liable for the tax was made aware of the failure. But let’s say you choose to not adhere to the warnings and don’t fix your plan.
So to recap, your company plan was audited, was found to be out of compliance, you acted reasonably, you did not exercise willful neglect, and you decided not to fix the error within 30-days of the notice of failure (we’re way deep in the theoretical here). You’d be forking over $365,000 ($36,500 multiplied by 10 employees) to Uncle Sam, right? Probably not.
Ready for another caveat? Under our theoretical example, the company’s actual excise tax would be equivalent to the lesser of:
1. Ten (10) percent of the aggregate amount paid by the employer during the preceding taxable year for the plan, or
I’m not making this up. Our example company would self-report an excise tax of $3,650 ( [10 employees x $304/employee/month x 12 months] x 10%). Yes, one less zero than our scary friend $36,500.
Let’s be clear. If your plan failure was not due to reasonable cause or your company/plan exercised willful neglect, you could be subject to the daunting $36,500 excise tax.
But let’s also be realistic. The “limitations on amount of tax” in 4980D exist for a reason. Businesses aren’t, under most circumstances, helping their employees with individual insurance and willfully neglecting plan requirements. Most businesses are doing everything in their power to remain compliant and follow the rules.
Businesses that find themselves here should know there are compliant plans that allow an employer to reimburse employees for individual health insurance (preventive care coverage is required also, to satisfy one of those Market Reforms). For example, a Healthcare Reimbursement Plan (HRP) is designed specifically to meet the requirements of the Market Reforms will stand up to an audit.
Real vs. Perceived Risk
Article after article has been written, many by reputable authors, about the $36,500 fine small businesses could face for performing individual health insurance reimbursement/payment out of compliance. This is a huge perceived risk to a small business with a tight budget.
What hasn’t been written about, however, is the real risk. If a small business is audited, and if their plan is found to be out of compliance, it’s likely no fine would be levied at all (due to the 30-day grace period for businesses that weren’t operating out of willful neglect). Even if the grace period were disregarded, the actual fine would likely only be a fraction of the $36,500 per employee advertisement.
Additionally, small business owners who want to minimize their risk (what business owner doesn’t?) can simply adopt a plan that will avoid the fees altogether, such as an HRP.
—– JD Cleary of Zane Benefits