Calculating and Paying the Excise Tax for Violating the ACA Market Reforms

Code Section 4980D imposes an excise tax equal to $100 per day per individual (theoretically, $36,500 per year per person) for not complying with the ACA market reforms. For employers with “employer payment plans” that do not satisfy the ACA market reforms, this penalty theoretically could be imposed for every employee who receives reimbursement of insurance premiums. In addition to the transition relief discussed in a prior post the tax can be reduced, or potentially eliminated entirely, if it was due to reasonable cause and not willful neglect.

No Tax If No-One Knew or Should Have Known About the Failure

First, the penalty could be avoided entirely for any period that the employer could show that no-one at the employer knew, or exercising reasonable diligence would have known, that the failure occurred. Code Section 4980D(c)(1). It is not clear what evidence a taxpayer would need to support taking this position. The Excise Tax return used to report the tax (Form 8929) permits tax payers to calculate the tax as $0 by claiming this exemption without submitting anything other than the Form 8928 claiming the exemption. See the form 8928 here and the Form 8928 Instructions here

No Tax If Failure Was Due to Reasonable Cause and Is Corrected Within 30 Days

Second, the penalty could be avoided if the employer could show that (1) the failure was due to reasonable cause and not willful neglect, and (2) the failure is corrected within 30 days after the employer learned of the failure. Code Section 4980D(c)(2). Correction means the failure is retroactively undone to the extent possible and each beneficiary of the plan is put in the same financial position they would have been in if the failure had not occurred.

It is not clear how one would correct a failure to satisfy the market reforms. In the case of employer re-imbursement plans, options to consider include (1) undo the premium reimbursement arrangement by requiring the recipients to return the re-imbursement; (2) make the reimbursements taxable and then provide additional taxable compensation to all employees so that all employees receive the same amount of additional taxable compensation (either as a percentage of their base, or as a dollar amount); or (3) determine whether anyone was subject to an annual limit or preventative care cost sharing provision under the individual policy (i.e. the market reforms applicable to group plans) that they would not have been subject to had those policies complied with the group policy mandates in that regard, and then provide them additional reimbursement to cover the costs of those services. Each of these options has potential problems and none of them is specifically approved. We recommend employers consult their counsel regarding their particular facts and circumstances before fashioning a correction.

The Tax is Limited to 10% of the Premiums paid.

Finally, for a single employer plan the maximum penalty in the case of a failure that was due to reasonable cause and not willful neglect, is 10% of the amount paid for the group health plan by the employer for the year. In the case of a n employer reimbursement plan, this would be 10% of the mount of the premiums paid or reimbursed by the employer. Code Section 4980D(c)(3).

Author: Erwin Kratz

Erwin Kratz practices exclusively in the areas of ERISA and employee benefits law, focusing on tax and regulatory matters relating to qualified and nonqualified deferred compensation and welfare benefits.

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