New Tax Treatment for Section 105 Plans
The Patient Protection and Affordable Care Act (ACA) substantially changed health care law. One little known and surprising feature of the law is that it changed the rules for employers who reimburse employees for their health insurance costs. In the past, an employer could provide a non-taxable benefit to employees to help the employee pay for their health insurance costs.
ACA has changed the Section 105 arrangements. Beginning in 2014, these health insurance reimbursement plans are considered “a separate health insurance plan” that must comply with all provisions of the ACA law. Such plans do not generally meet the requirements of ACA , so these payments are no longer tax-free. Employers who do not appropriately deal with this interpretation may be subject to a penalty of $100 per day, per employee, for non-compliance. For one employee out of compliance for one year, the penalty could be as much as $36,500! The ACA enforcement team, the IRS, will be on the lookout to collect these penalties.
For 2014, there may be a “one-time” possible fix for this ACA dilemma. Employers who provided this benefit in 2014 may be able to escape the penalty provisions if they amend payroll tax returns and treat the Section 105 benefit as taxable compensation, subject to income tax withholding, payroll, and related taxes. Even so, the penalty may apply. The rules and regulations surrounding the ACA are complex and expansive.
If you have a section 105 plan, or believe you have a plan that may be treated as one, please check with your employee benefit specialist or a qualified labor law consultant or attorney.