December 6, 2014 by Tony Novak
I wrote in a comment about an earlier article that I conclude that the new 2014 small business health plan excise tax penalty risk for most small employers is 10% of the amount they paid for employee health care expenses. I estimated that many – perhaps more than a million small businesses – are at risk for that new tax penalty imposed under Section 4980D of the Internal Revenue Code.
My comments are speculative. This post lists some of the assumptions I used to reach my conclusion:
1) IRC 4980D is a new section of tax law effective January 1, 2014. Most accountants and small businesses are not familiar with it yet.
1a) the basic penalty is $100 per employee per day. Most media attention and IRS publications refer to this penalty.
1b) The law contains wording for less severe penalty of 10% of employer cost for violations “due to reasonable cause and not to willful neglect”
1c) I presume most small business employer violations for 2014 would fall in the lesser penalty category.
2) IRS will increase the number of small business health plan ACA compliance audits in 2015 and 2016.
2a) the audit trigger might be the reported employee benefit cost as compared to another metric such as average or reported health insurance cost
3) The timing of the first audits will be middle to late 2015.
3a) The examination will threaten a $100/employee/day penalty but will settle for the 10% penalty
3b) The purpose of the November 6, 2014 FAQs by IRS and DOL was to warn employers of the risk of violation.
4) Once a representative number of post-ACA small business health plan audits are completed, awareness and voluntary compliance will increase.
4a) The first prosecution of a $100/employee/day won’t happen before 2016 and the final settlement would be later than that.
4b) CPA and small business awareness of small business health plan excise tax penalties will increase in 2015.
5) It would be politically unacceptable to assert the $100/employee/day fine against too many small businesses. Such fines, if exerted as prescribed under the law, would put many small employers out of business.
5b) A small business employer who paid a 10% tax penalty for 2014 (sometime in late 2015) and then did not voluntarily change their health plan might be subject to the larger tax penalty for 2015.
5b) A small business employer examined for 2014 and found in violation would face a reasonably high risk of a similar examination for 2015. In some cases the examinations may be overlapping or opened at the same time.
Again, these are speculative personal opinions and should not be considered as tax advice.