Among the many changes the Affordable Care Act is making in the health insurance market, one of the most overlooked is a potentially big problem for small businesses. This change affects many companies that fall well under the 50-employee minimum for required group insurance.
It’s been very common for these smallest businesses, which may have just a handful of employees, to help out those employees with a subsidy for their health insurance. Instead of setting up a group insurance plan, these employers have made a tax-free payment meant to help their workers pay the premiums on their individual policies.
Historically, this was a common and popular practice for businesses that didn’t provide group health insurance.
Unfortunately, as of Jan. 1, 2014, it’s no longer possible.
Under the federal Public Health Service Act, as amended by the Affordable Care Act, these tax-free reimbursements aren’t permitted any more. That doesn’t mean an employer can’t still subsidize employees’ health-insurance premiums. But those payments must now be considered as compensation. And that means they are now taxable, and subject to withholding.
Getting this wrong can be very, very costly.
Code Section 4980D is one of those obscure parts of the federal tax code you’ve never heard of. But it’s something it’s my job to know about. It says you could pay hefty penalties if you don’t comply with the new law. If you reimburse employees for their individual health insurance premiums, and don’t add that reimbursement to their taxable wages, you could be subject to a penalty of up to $100. Per day. Per employee.
I’ll say this again: $100 every day, for every employee. This means potentially paying $36,500 a year for everybody on your payroll.
Now that I’ve gotten your attention, and given you a scare, let me tell you the good news. Yes, if you keep making these payments, and comply with the law, it could cost your employees a bit more in taxes. But since they’ll still be in the private insurance market, they could well qualify for a federal subsidy through the new insurance exchange. Whether they can claim their insurance premiums as deductions will still depend, as it always has, on whether they itemize on their Form 1040, and whether their total health-care expenses exceed a certain percentage of their income.
For you as an employer, because these payments are now considered compensation, they are deductible as a normal business expense. The most important thing for you to do now is to make sure your payroll processing system is set up to handle this correctly, for all wages or salaries earned after Dec. 31, 2013.
Please consider everything I’ve said here to be general information, and not a substitute for the advice your own accountant should give you. Remember that every business’s circumstances are unique. So ask your accountant or tax adviser about the specific steps you may need to take to comply with this new requirement.
My goal is to give my clients and the public useful information, explained in plain English, about their finances and taxes. If you have a question you’d like me to answer in a future article, please let me know.
Randy McIntyre is a Certified Public Accountant and a partner in McIntyre, Paradis, Wood & Company, CPAs. He has worked in public accounting since 1977, in Wilmington since 1992. His firm is built on a history of service, technical expertise, and innovative to provide the expertise of larger firms with a personal, one-on-one approach. To learn more about McIntyre, Paradis, Wood & Company, see www.mpwcpas.com. He can be reached at [email protected] or 910-793-1181.
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