Delay Of Employer Mandate Will Allow Government To Issue More Guidance, IRS Confirms

The government’s decision to postpone the employer mandate enacted in the Patient Protection and Affordable Care Act (ACA) “will allow us to get more guidance out,” Kevin Knopf, senior technician reviewer, IRS Tax Exempt and Government Entities, said July 9 on Tax Talk Today, a web-based program on taxes. Knopf, on detail to the IRS from Treasury’s Office of Benefits Tax Counsel, said that the government will issue proposed regulations in 2013 under Code Sec. 6055 (reporting of insurance by employers and insurers) as well as Code Sec. 6056 (reporting by employers of coverage provided to employees). The proposed regulations will help people know what to do, he said. In the meantime, the government hopes that employers will continue to provide insurance coverage or will start to offer coverage.

Ben Tallman, an enrolled agent from Atlanta, said that the employer penalties can be devastating to a small employer. The IRS cannot use its ordinary collection tools to collect the penalty. Tallman said this limited collectability is beneficial. He also noted that the government is encouraging employers to implement the reporting requirements in 2014, but without any penalties.

When reporting begins, employers will have to identify their full-time employees and indicate whether they were offered health insurance coverage, Knopf said. Reports for 2015 will be filed in 2016. At that point, the IRS may look at whether any employees got health insurance premium tax credits; then the IRS may notify the employer of potential penalties.

Employees cannot claim a premium tax credit if the employer offers affordable minimum essential coverage, Knopf said. As long as the employer offers adequate coverage, it is not necessary that the employee take it, he indicated. Coverage also must be offered to dependents of employees; Knopf said that some commenters think that the definition of children (as dependents) is too broad.

John Sheeley, an enrolled agent from Goshen, N.Y., noted that the individual mandate was not postponed and will still take effect in 2014. Practitioners need to notify their clients about this requirement, Sheeley said. Knopf noted that the IRS will determine through Code Sec. 6055 reporting (by issuers) who has minimum essential coverage, as required by the ACA. Any penalty will be collected primarily through refund offsets, Knopf indicated. Asked whether the IRS will send a notice to individuals who may be liable for the penalty, he said that the IRS “is still developing those processes.”

The penalties for the individual mandate are set at $95 the first year for an individual, increasing to $325 and then $695, Sheeley stated. For a family lacking coverage, the maximum penalty is three times these amounts. Tallman noted that the penalties are increased for taxpayers in higher income brackets.

Knopf also discussed health savings accounts (HSAs). HSAs are tax-favored accounts that can accept both employer contributions (which are tax-free) and individual contributions (which are deductible). Distributions for medical expenses are not taxable. Distributions for nonmedical expenses are included in income and subject to a penalty. The penalty was 10 percent; ACA increased it to 20 percent. However, there is no penalty once the taxpayer turns age 65. Tallman noted that some clients used to contribute to Archer medical savings accounts, but he said that HSAs are better.

Health flexible spending accounts (FSAs) are typically funded through salary reduction contributions, Knopf said. They cannot be used to pay for insurance or for over-the-counter drugs. ACA limits contributions to $2,500 a year. Before ACA, there was no contribution limit, unless the employer imposed one. Sheeley observed that the $2,500 cap will hurt most people.

Employers must set up and fund a health reimbursement account, Knopf said. Unlike FSAs, amounts in the fund can be carried over from year to year. They can be used for any medical expenses, he said. The government recently clarified that HRAs cannot be done as a stand-alone plan, except for retirees, Knopf noted.

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