IRS Provides Limited Bare-Counties SHOP Relief

IRS Notice 2018-27 provides limited relief for employers who wished to utilize the small employer health insurance tax credit but there were no available plans in their county.

As a reminder, the tax credit is available for a two-consecutive tax year period. It was first available for tax years beginning after December 31, 2009. To qualify for the credit, eligible small employers had to offer coverage to employees through a SHOP exchange. Employers had to claim the credit using Form 8941. The credit was available to tax exempt organizations as well.

Transition relief was previously available for tax years 2014, 2015 and 2016 for some small employers where the employer’s principal business address was in a county in which no qualified health plans (QHPs) through the exchange were available. Notice 2018-27 builds on this prior relief for 2017 and 2018.

This latest relief is more limited than prior relief in that an eligible employer must have claimed the credit for all or part of a taxable year beginning after December 31, 2015. An employer may take the credit for any remaining credit period for health insurance coverage, if no SHOP coverage was available, provided that the coverage would have qualified for the credit under the rules applicable before January 1, 2014.

The relief does not extend availability of the credit beyond the two years of the credit’s availability.

Employers have to determine whether a county had coverage available through the SHOP. The notice advises that this information is available for 2017 here. Information on whether a particular county has SHOP coverage available for 2018 and beyond can be found by checking http://www.healthcare.gov/small-business .

The notice provides examples that illustrate which employers might qualify for the tax credit.

The notice also advises that Hawaii’s State Innovation Waiver prohibits employers in Hawaii from claiming the tax credit for plan years beginning in calendar years 2017-2021/

IRS Notice 2018-27 can be found here.

IRS information on the Small Business Health Care Tax Credit can be found here.

Déjà vu — IRS Revises HSA Family limit

IRS Revenue Procedure 2018-27 returns the annual limit for 2018 HSA family contributions to $6,900. This follows and supersedes Revenue Procedure 2018-18 which was published this past March.

The IRS acknowledged that the $50 reduction to the limit on HSA deductions for family HDHP coverage imposed “administrative and financial burdens.” The notice reflected that these burdens fell on individuals who had already made the maximum contribution for the year based on the announcement made in 2017 (Revenue Procedure 2017-37) but also on employer plans where individuals had established annual salary reductions based on the $6,900 limit.

The notice provides procedures for repaying the $50 if the amount had been returned as an “excess contribution” based on the March announcement. Revenue Procedure 2018-18 notes, however, that “in accordance with Q&A-76 of Notice 2004-50, a trustee or custodian is not required to allow individuals to repay mistaken distributions.”

IRS Revenue Procedure 2018-27 can be found here.

Tax Reform Changes HSA Limit

In the spirit of “beware what you wish for” the recent tax reform law included a small surprise for those with health savings accounts (HSAs). Page 400 of IRS Bulletin number 2018-10 contains a revision -downward – of the HSA family contribution limit.

The revision is due to a change in how the amount is calculated. “Chained CPI” will be used for annual inflation adjustments beginning with the 2018 tax year instead of using the CPI (Consumer Price Index).

For the tax year 2018 the new “chained CPI” calculation will reduce the HSA contribution limit for family coverage to $6,850 instead of $6,900. This is a reduction of $50. The self-only limit remains unchanged from the previously announced amount of $3,450.

As a reminder, the self-only limit for 2017 was $3,400. The family limit for 2017 was $6,750.

Anyone who has contributed an amount in excess of $6,850 for 2018 should contact their HSA administrator to address the excess contribution.

The complete IRS bulletin 2018-10 can be found here.

ACA’s Individual Mandate — Still in Force

The new tax law passed by Congress and signed by the President does not repeal the individual mandate as many people have assumed. The tax law actually zeroes out the individual mandate penalty. And, importantly, this action takes effect in 2019.

The actual law text is:

SEC. 11081. ELIMINATION OF SHARED RESPONSIBILITY PAYMENT FOR

INDIVIDUALS FAILING TO MAINTAIN MINIMUM ESSENTIAL COVERAGE.

(a) IN GENERAL.—Section 5000A(c) is amended—

(1) in paragraph (2)(B)(iii), by striking ‘‘2.5 percent’’ and inserting ‘‘Zero percent’’, and

(2) in paragraph (3)—

(A) by striking ‘‘$695’’ in subparagraph (A) and inserting ‘‘$0’’, and

(B) by striking subparagraph (D).

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to months beginning after December 31, 2018.

For individuals who question whether the IRS will continue to enforce the individual mandate, knowing that penalties will go away next year, only time will tell. For the 2018 tax filing season, the IRS has stated that they will not accept tax returns that omit information specifying whether an individual had coverage or whether they qualified for an exemption from the individual mandate.

Opinions are mixed on what effect no penalty assessment will have on how many people maintain health coverage. Employers may find that some employees will drop employer-sponsored coverage since the employees will no longer face a penalty if they don’t have coverage.

Some individuals may no longer purchase individual health insurance. But, the extent to which individuals purchased coverage to avoid the somewhat low individual mandate penalty is unknown.

One likely outcome is that there will be an uptick in adverse selection. Adverse selection occurs when individuals who believe that they will have medical expenses seek out or retain health insurance coverage when they might not otherwise do so. Until the extent of any adverse selection is understood, insurers are likely to be conservative in their pricing or in their decisions on which markets they will participate in.

Cautions and Caveats Regarding Health Care Sharing Ministries

There has been a significant increase in enrollment in health care sharing ministries over the years since enactment of the Affordable Care Act (ACA). ACA specifically referenced health care sharing ministries, allowing an exemption from the individual mandate for individuals participating in one.

According to the Alliance of Health Care Sharing Ministries there are more than 100 registered health care sharing ministries across the country. And, the alliance claims more than one million participants.

A health care sharing ministry is not insurance. Instead, they are faith-based organizations that provide “financial, emotional, and spiritual support” to members. Participating individuals pay a monthly membership fee if they meet the qualifications to join the ministry. In many cases, the monthly membership fee is significantly lower than an insurance plan.

Qualifications may require regular attendance at worship services, abstention from tobacco and alcohol and other unhealthy activities. In some cases applicants must pledge to live a Christian lifestyle or get a recommendation from their clergy.

Since these plans are not insurance, states are generally unable to require the ministries to meet solvency requirements or establish required reserves for claims. Other protections regarding appeals for claims decisions are also not applicable to these plans.

A new wrinkle with the health care sharing ministry plans is the interest of some employers in offering these plans to employees. Apart from the concerns regarding solvency and minimal state or federal oversight, there are tax implications to consider. A letter from the IRS unequivocally states that a health care sharing ministry is “not employer-provided coverage under an accident or health plan.” The cost of employee participation is “not excluded” from the employee’s gross income. The IRS letter can be reviewed here.

Employers who are subject to the employer shared responsibility (ESR) provisions face additional hurdles if considering these plans. A health care sharing ministry plan is not considered minimum essential coverage (MEC). As such, employers could face ESR penalties if they cannot meet the required 95% offer of coverage requirement to avoid the “no offer” penalty of $2,320 per employee in 2018.

Employees may also balk at an employer offering a plan that is inextricably tied to religion and religious practices.

Employers should obtain legal guidance before offering a health care sharing ministry plan to explore all issues surrounding these plans. Individuals interested in the plans should ensure that they understand fully the requirements and restrictions associated with them.

ACA Employer Reporting Penalties Increase for 2018

Many employers are getting unwelcome mail from the IRS –Letter 226J- assessing employer shared responsibility penalties. Early reports of employers receiving these letters are that errors made on the 1094-C and 1095-C forms may be the trigger.

Hopefully, these errors can be corrected and many of the penalties will be abated. But, this experience points out how important completion and filing of these forms can be. It is far better to file information correct and timely and avoid having to address an IRS missive demanding penalties!

Employers who fail to file reports timely or with incorrect information will find that doing so will cost more in 2018. Revenue Procedure 2017-58 ups some penalties for 2018.

Scenario                                            Penalty Per Return 2017         Penalty Per Return 2018

Failure to file correct returns                           $260                                                  $270

Failure to file w/in 30 days of due date          $50                                                    $50

Failure to file by August 1                                  $100                                                 $100

Intentional Disregard                                          $540                                                 $540

These are filing penalties. Employers may also face employer shared responsibility penalties for not offering coverage or for offering coverage which doesn’t meet the affordability standard.

The IRS notice regarding penalties can be found here.

30 Days to Act on IRS Letter 226J

Nestled amid holiday cards may be a less welcome letter from the IRS. The IRS has confirmed that the initial notices to employers that they may owe employer shared responsibility (ESR) penalties are going out before year-end. Letter 226J will address preliminary calculations of amounts employers owe for tax year 2015.

Employers subject to the ESR provisions are those employers who met the definition of an “applicable large employer” or ALE.  ALE status, according to the IRS, is determined each calendar year, and generally depends on the average size of an employer’s workforce during the prior year.  An employer who has at least 50 full-time and full-time equivalent employees on average during the prior year is an ALE for the current calendar year.

For calendar year 2015, the Employer Shared Responsibility Payment (ESRP) amounts are $2,080 and $3,120.

What Employers Must Do

First and most important is that employers should not ignore this letter. In fact, with only 30 days to respond, employers should be on the lookout for the letter which is expected to be sent before the end of this year.

Employers must tell the IRS whether they agree or disagree with the IRS’ assessment.

If the employer agrees with the findings in the letter he must complete, sign and date the Form 14764 response. It must be sent by the date indicated on the first page of the letter. Payment should accompany the letter or it may be paid electronically.

An employer that disagrees with the IRS’ assessment must also complete Form 14764. There must be a signed statement explaining the areas of disagreement. Documentation supporting the statement must be provided. Employers providing added documentation should indicate this by entering a check in the column on the Employee PTC listing titled “Additional Information Attached.”

Employers are not directed to file a corrected Form 1094-C. Instead, any changes should be made on the Employee PTC Listing.

The IRS will reply with an acknowledgement letter following the employer’s response that provides their final determination.

If the employer does not respond within the time frame the IRS will send a Notice and Demand for the proposed amount in the letter 226J. The amount will be subject to IRS lien and levy enforcement actions. Interest will also accrue from the date of the Notice and Demand and continue until the amount due is paid.

Note that the ESRP is not deductible for income tax purposes.

Employers should keep a copy of the letter and any documents that are submitted to the IRS.

The IRS has a web page to explain the letter 226J. It can be found here.

IRS Drops the Mic on Employer Shared Responsibility Payments

Employers who have been counting on the IRS to forget about employer shared responsibility payments apparently have run out of luck. The IRS recently revised one of their FAQ documents to outline their upcoming issuing of penalty demand letters.

Employers can look forward to receiving Letter 226J. The letter will include:

  • A summary table itemizing each month an employer may be liable for a payment
  • A response form, Form 14764, “ESRP Response”
  • Form 14765 which will list by month an ALE’s assessable full-time employees
  • A description of actions the ALE employer should take to dispute the letter’s findings.

The Letter 226J will include a due date for the employer’s response. It will generally be 30 days from the date of the letter. If an employer doesn’t respond or doesn’t respond timely, the IRS will issue a notice and demand for payment, Notice CP 220J.

Letter 226J can be found here https://www.irs.gov/pub/notices/ltr226j.pdf

Samples of the letters and forms are not yet available for review. However, the IRS states that the Letter 226J for calendar year 2015 will be issued in “late 2017.”

The IRS FAQs that provide details are numbered 55-58 and can be found here.

IRS Invokes ACA Individual Health Care Reporting Requirement

The IRS has announced a change of course regarding individual tax returns and ACA compliance. Individual tax returns filed in the 2018 filing season will not be accepted if the taxpayer does not indicate whether they had health coverage.

The IRS had previously planned to reject returns without the health coverage information during the 2017 filing season. They reversed course early in 2017 to respond to the Trump administration’s executive order to reduce administrative and regulatory burdens. This latest October 2017 announcement provides ample time for taxpayers and their tax advisors to prepare for this change.

The IRS is instructing taxpayers to indicate on their Forms 1040 whether they and everyone else on their return had minimum essential coverage, qualified for an exemption or whether they are making a payment for not having coverage.

The IRS statement on the reporting requirement and resources for tax professionals can be found here.

Taxpayers who fail to report whether they had coverage could face penalties for late filing due to the IRS not accepting a return. The IRS will not accept returns that omit the coverage information. As such, a person filing on April 17, 2018 who has their return rejected would be considered to be a late filer when they finally correct their omission. Note: The filing date for 2018 is shifted as April 15, 2018 is a Sunday and Monday is the Emancipation Day holiday in Washington, D.C.

Archived IRS tax tips note that there are eight (8) important points for filing or paying taxes late. Of note, both late filing and late payment penalties may apply in some situations. The maximum amount charged for the two (2) penalties in 2017 is five percent (5%) per month. IRS facts about late filing can be found here.

More information on the individual shared responsibility provision can be found on the IRS website here.

Keep on Complying!

One would have to be in a deep sleep to avoid the barrage of “news” regarding Congressional action to repeal the Affordable Care Act (ACA). But, all of the drama does not mean that anything has changed… yet.

Health insurance brokers have been fielding calls from clients asking if they still have to file forms 1094-C and 1095-C  which are due to the IRS by March 31, 2017.

The answer is, yes!

Other brokers and accountants are being asked if individuals should complete their tax returns due in April including the information regarding health coverage.

Once again, the answer is, yes!

Complying with the provisions of the Affordable Care Act will be required until legislation has passed both houses of Congress and been signed into law. Even after President Trump takes action, it’s likely that some provisions of the new law will be phased in. As a result, compliance with provisions of the Affordable Care Act (ACA) may be part of the compliance landscape for some time to come.