The Affordable Care Act — Tax Implications For Employers

by Juliana Reno  on Monday, Aug. 12, 2013 12:00 am  

Juliana Reno

Almost every employer will have to make substantive changes to its group health plan — changes to the benefits, changes to the eligibility rules, changes to the amount of premium paid by the employer, or some combination of these — in order to comply with the Affordable Care Act (the “ACA”).

Virtually all of these changes will have some tax implications. In addition, there are some provisions of the ACA that are purely tax related. This is a brief overview of the key tax issues in the ACA, with those that generate the most questions from my employer-clients presented first.

A large employer (one with at least 50 full-time equivalent employees) must offer minimum value, affordable health coverage to all of its full-time employees or pay a penalty. This is popularly known as the “employer mandate” or the “pay-or-play” rule.

Most employers will find that the most appealing option is to partly play and partly pay. These employers will offer group health coverage and subsidize it by making some contribution to the premiums for some employees, knowing that if the contribution is not enough to make the coverage “affordable” for some employees, the employer may incur a penalty. Because of a recently delay in the pay-or-play rules, penalties will begin to accrue in 2015.

Tax Points:

• Employer contributions to health plan premiums generally are tax-deductible business expenses for the employer.

• In contrast, employer penalty payments are not tax-deductible.

• For-profit employers should take note: paying $3,000 in premiums is a lower net cost than paying $3,000 in penalties.

• Employers will have new reporting requirements that will allow the IRS to calculate the penalties. The IRS has not yet issued guidance on those requirements, but it is expected during the coming year.

Coverage Mandates.
Under the ACA, employer group health plans must contain certain provisions. For example, there can be no annual or lifetime limits on essential health benefits. If a plan fails to comply with these mandates, one of the penalties is an excise tax. Some of the coverage mandates are effective now, and some take effect later, with variations for grandfathered and non-grandfathered plans.

Tax Points:

• The excise tax is $100 per affected person per day during the period of noncompliance.



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