The Irony of Yesterday's Limited ACA Penalty Relief

February 19, 2015
Kristine A. Tidgren

I'm not trying to sound ungrateful for the much-needed guidance we received from IRS yesterday in Notice 2015-17. Relief from penalties, even if limited, is always welcome.

But next time, I would prefer more actual guidance and not just more ad hoc penalty relief. This winter was nearly unbearable for many tax professionals with small business clients because no one had any idea how to guide them with respect to illegal plans that had continued into 2014. And it seems that the majority of such plans did continue, even though Notice 2013-54 was issued in the Fall of 2013.

Yesterday, IRS said that penalties would be waived for illegal premium reimbursements made by small employers in 2014 through June 30, 2015, and that these premium reimbursements remain tax-free to the employees. That's great and welcome news for those that didn't follow the law. I think it was important, given the confusion and the widespread violations, that such relief was granted. But I don't believe it went far enough. Employers who continued to offer medical reimbursement plans and HRAs have no such relief. They are still dependent upon the mercy of IRS in filing Form 8928. It's also ironic that the real losers in this saga are the employees of employers who complied with the law from the begiinning and eliminated their illegal payments plans completely in 2014.

Under the new guidance, if an employer continued its noncompliant $6,000 premium reimbursement plan through 2014, the employee received that money tax free, purchased his or her policy, and the employer faces no penalty. That's great. If, on the other hand, the compliant employer eliminated the illegal premium reimbursement plan in 2014, and instead raised his employee's salary by $6,000 to offset the lost benefit, the employee likely paid close to a third of that increased wage toward state, local, and FICA/FUTA taxes. Furthermore, if the employee purchased health insurance through the Marketplace, the increased salary most likely significantly lowered his or her premium tax credit. Bottom line, the employee of the compliant employer walks away with only about 60% of the benefit received by the employee of the noncompliant employer.

I guess this is the impact of the ACA. And this will be the result for all such employees after June 30, 2015. But for all those who did it right in 2014, it just doesn't seem, well..."right."

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

RSS​ Facebook Twitter