Update on HRA small business penalties for 2014

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November 24, 2014 by Tony Novak

The new tax penalty for 2014 employer-sponsored health reimbursement arrangements HRAs will be 10% of the amount the employer paid for the non-compliant reimbursements for most small business HRA plans and not the $100/employee/day more severe penalty.The reason for the reduced penalty is that most small business owners are not aware of the violation triggered by a change in tax law for 2014.

Most (perhaps about 8 out of about 10 that I have talked with about this specific issue) of the small business HRA plans I’ve seen or been told about fall into this non-compliant category where the business simply was caught unaware of the change in tax law for 2014. I’m presuming that IRS won’t take the position that failure to follow its previously published FAQs is willful neglect. The tax penalty will be self-reported on Form 8928 which has not yet been updated for 2014 reporting. IRS may tell us more in a scheduled tax planning meeting on January 8. References follow the article at http://tonynovak.com/article/10-things-small-businesses-must-know-about-HRAs.html.

The take-home message for tax advisers and small business owners is that the majority of reimbursement arrangements will be subject to a 10% excise tax for 2014. So if an employer reimbursed an employee for $2,000 insurance expense then the excise tax will be $200 plus applicable wage taxes, penalties and interest.

The non-compliant HRA problem should be corrected immediately, however, because the “not due to willful neglect” excuse will not hold up for two years in a row for the same violation. If the same problem used in this example above continues to exist in 2015 then the excise tax penalty jumps from $200 to $36,500!

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