Penalties & Reporting for Violations of ACA Requirements

 

March 26, 2015

If you are a private employer (non-governmental) who has failed to comply with the various portability, access and renewability requirements imposed on your single employer group health plan by the Affordable Care Act (ACA) (such provisions are found in Chapter 100 of the Internal Revenue Code and include prohibitions against annual or lifetime limits, pre-existing condition limitations and waiting periods in excess of 90 days, as well as a requirement to provide no-cost preventive services and other requirements), you must timely report your violation and pay the related excise tax under Section 4980D of the Internal Revenue Code. This includes employers who sponsor medical reimbursement plans or health reimbursement arrangements that have improperly reimbursed premiums for individual health insurance, another employer’s health plan, TRICARE or Medicare, or medical expenses that do not fit within a limited exception from the ACA limits (please see our recent alert on these arrangements here).

You should periodically check your compliance from time to time, since quick corrective action could save you significant dollars.

Penalties & Exceptions

The excise tax is $100 per day of noncompliance for each individual to whom the ACA failure relates. In most cases, this means the excise tax is calculated based upon the number of your full-time employees. The noncompliance period begins on the date of the first failure and ends on the date of correction.

However, it is important to note that certain exceptions and limits to the excise tax are available:

1. if you can demonstrate that you did not know (and, in exercising reasonable diligence, would not have known) that there was a compliance failure, no tax is due.
2. if you can demonstrate that the failure was due to reasonable cause rather than willful neglect and was corrected within 30 days after you first knew (or, in exercising reasonable diligence, should have known) that the failure existed, no tax is due (note that church plans may have a longer correction period).
3. if you can demonstrate that the failure was due to reasonable cause and not willful neglect, your tax is reduced to the lesser of 10% of the amount that you paid during the preceding tax year for group health plans, or $500,000.
4. if you can demonstrate that the failure was due to reasonable cause and not willful neglect, the IRS also has the power to waive part or all of the tax, to the extent the payment would be excessive relative to the failure involved.

Additionally, even if you meet an exception from the excise tax, it is important that you promptly take correction steps because a minimum excise tax will apply for compliance failures that occurred or continued during a taxable year if they are not corrected before you are notified by the IRS of an audit of that taxable year. The minimum excise tax is the lesser of the excise tax that would have been owed without applying the exceptions above or $2,500 per individual,but it is increased to $15,000 per individual if violations are "more than de minimis."

A failure is treated as “corrected” if it is retroactively undone to the extent possible and affected employees are placed in a financial position as good as they would have been in had the failure not occurred.

Reporting

If you have committed a violation, you must self-report the violation on IRS Form 8928 (Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code). It is unclear whether employers can avoid this filing requirement if they feel they clearly satisfy one of the first two exceptions above that exempts the employer from all taxes and does not otherwise contemplate IRS action to actually waive the taxes. However, since your qualification for these first two exceptions will be based on the facts and circumstances, it appears that you will only achieve certainty by filing the IRS Form 8928 and indicating that $0 is due.

You must file the IRS Form 8928 and pay any excise tax by the due date for filing your company’s income tax return for the taxable year in which the failure occurred (or continued). If your failure spans more than one taxable year, you will need to allocate and report the noncompliance periods to the proper taxable year. No deadline extension is available if you extend the date to file your company’s income tax return, but you may obtain an automatic 6-month extension by filing IRS Form 7004 on or before the deadline for the IRS Form 8928. However, obtaining this extension does not extend the time for you to pay any excise taxes due (so you will need to estimate taxes and may potentially owe interest on late payments), and the IRS has the right to terminate an automatic extension upon written notice to you.

Employer Actions

Since the ACA requirements have not been in effect for very long, it is unknown how strictly the IRS will enforce them. Many experts believe that the IRS is likely to audit compliance in this area because of the significant penalties involved and the overall need to fund other ACA costs.

Given the magnitude of the potential excise taxes that could become due under Code Section 4980D, and the possibility of a complete waiver if errors are quickly addressed, you should:

• quickly determine whether you have any issues with the portability, access and renewability requirements imposed by the ACA on your single employer group health plan(s), especially any medical reimbursement programs or health reimbursement accounts (HRAs), and
• periodically review your compliance with these requirements to make sure that problems are promptly identified, corrected and reported (if required).

With a team of professionals who are highly experienced in the employee benefits field, MLA can provide answers to questions and assistance in complying with these requirements. For assistance, please contact Ann Murray (404-527-4940) or any of our MLA benefits attorneys.
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