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  Tony Novak CPA LinkedIn profileContact: Tony Novak, CPA, MBA, MT
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A fix for small business health plans

Freedom Benefits offers low cost help for small business health plans in violation of the Affordable Care Act's restrictions on individual insurance and health care cost reimbursements.

by Tony Novak, CPA, MBA, MT     June 4, 2015

Tax penalties are looming for tens of thousands of small businesses that operate outdated health plans. IRS has threatened to soon begin penalizing small businesses that pay or reimburse health benefits that violate the tough new rules imposed by the Affordable Care Act. These rules were effective January 2014 but IRS granted an extension under Notice 2015-17 for small businesses that expires June 30, 2015. Beginning July 2015 - less than a month from now - small businesses with non-compliant health plans, especially employer arrangements that reimburse employee health expenses on a pre-tax or after tax basis - are subject to severe excise tax penalties.

If your small business (with under 50 employees) offers employee health benefits or reimburses employee health expenses, there are six important points to consider now:

  1. Your business is not required to provide any health benefits for employees or owners. But if you do elect to provide health benefits, make sure that you do it right or the tax penalties will far outweigh the benefits to your firm.
  2. In most cases the health benefits allowed for owner/employees and the owner's/shareholder's relatives are more restricted than those available to common law employees. Make sure that you are clear on the distinctions.
  3. Benefits not paid through insurance (like health care reimbursements) require a plan document, written disclosures and substantiation of claims paid. Make sure those documents are available and up-to-date.
  4. Realize that you may think your health plan meets current requirements and your accountant or insurance agent might even have agreed. But IRS has published a written warning that it is aware of a high level of misinformation circulating on the internet about this topic. The risk of professional error is high. We presume that the next step for the IRS is to prosecute some number of firms in violation to make its point clear. So if you are not certain of your health plan's legal compliance status, get a written second opinion from a reliable independent source. Given the size of the potential penalties, it does not make sense to treat this issue casually.
  5. If your business is in violation of any provision of ACA, make sure to correct the issue before June 30, 2015. Correction of violations typically involves modifying the plan documents, communicating the changes to employees and making necessary adjustments to payroll records. This can usually be accomplished quickly and at little cost. 
  6. Because of the two levels of tax penalties built into the new IRC 4980D - the regular "severe" penalty and a lesser penalty for unintentional violations - it would be foolish to attempt to represent yourself in correcting the problem or representing yourself before the IRS on this issue. It is tough to simultaneously argue that your violation was unintentional yet you are knowledgeable and capable of the law required to making the corrective filings and handling representation to address the exact same tax issue. This is an area where professional representation is a must.

The primary IRS guidance on this issue is Notice 2013-54 that includes Q&As. More information on this topic is available on my web site and blog

In many cases violations can be corrected simply and easily. I offer a $100 flat fee consultation what has been useful by some small busines owners in identifyin problems and developing the best response to avoid tax penalties while still maximizing the value of health benefits for employees.

 See for a recent article with links in the "Additional resources" section.