Calculating small business health plan excise taxes

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November 3, 2015 by Tony Novak

Beginning in 2015, small businesses must report market reform violations on Form 8928. This article does not cover the triggers for such taxes. See this post for more information on the common triggers of this penalty tax.

There are two new types of excise tax penalties covered under Internal Revenue Code Section 4980D. Once an argument is reached to determine which penalty applies, the calculation is straightforward:

Section A penalty is “Failures Due to Reasonable Cause and Not to Willful Neglect” that is 10 percent of the total amount paid for employee health benefits for affected employees. This penalty may be claimed if the failure was not discovered, despite exercising reasonable diligence, or was corrected within the correction period and was due to reasonable cause. Under this scenario, an employer that paid $300 per month to reimburse an employee’s health care expenses would owe $180 excise tax ($300 x 6 months x 10%) for the covered employee.

The Section B penalty is “Failures Due to Willful Neglect or Otherwise Not Due to Reasonable Cause” that is a much larger $100 per employee per day excise tax. There are 184 days from July 1, 2015 to December 31, 2015 so it appears that the penalty would be $18,400 for an employee covered by a non-compliant health plan for the entire year.

This article does not cover which penalty applies however it appears that if an employer claimed the lesser penalty for 2015 then it would be unable to make the same claim in 2016 assuming that the same non-compliant health plan continued to exist in 2016. For that reason, it is urgent to modify small business health plans as soon as possible.

The Commissioner has statutory authority to offer penalty relief. IRS issued relief from the penalty for small businesses with less than 50 full time employees until June 30, 2015. So for 2015 only, the penalties on Form 8928 are calculated beginning on July 1. No guidance is available on the procedure for penalty relief beyond June 30, 2015 or whether any such relief will be granted.

4 thoughts on “Calculating small business health plan excise taxes

  1. […] upon examination. This article does not cover the calculation of the excise tax penalty. See this post for more information on the calculation of the penalty […]

  2. […] It is now clear that many small businesses are now racking up unnecessary tax bills that may be in the hundreds of dollars per day. By my conservative estimate, there are more than 50,000 small business owners throughout the United States, who owe an average of additional $19,200 federal excise tax for 2015 that are triggered solely by non-compliant health plan designs. Mechanical and procedural issues related to the calculation of the 2015 tax is covered in this separate blog post titled “Calculation of small business health plan excise taxes” […]

  3. […] It is now clear that many small businesses are now racking up unnecessary tax bills that may be in the hundreds of dollars per day. By my conservative estimate, there are more than 50,000 small business owners throughout the United States, who owe an average of additional $19,200 federal excise tax for 2015 that are triggered solely by non-compliant health plan designs. Mechanical and procedural issues related to the calculation of the 2015 tax is covered in this separate blog post titled “Calculation of small business health plan excise taxes” […]

  4. […] Calculating small business health plan excise taxes, 11/3/2015, a discussion of the procedural aspects of calculating tax penalties on non-compliant small business health plans […]

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