While conducting a health care reform webinar recently, we received questions that suggested the need to remind employers sponsoring group health care plans about their self-reporting obligations, and significant potential exposure to excise taxes. We are referring to excise taxes that are effective right now, not the new excise taxes that are slated for 2014 and 2018.
Sections 4980B, 4980D, 4908E, and 4980G of the Internal Revenue Code impose excise taxes for various failures of health care coverage requirements. For example, Section 4980B excise taxes apply to COBRA failures, and Section 4980D excise taxes apply for failure to comply with Code Chapter 100, group health plan requirements. The list of 4980D triggers has grown substantially since enactment of the Genetic Information Nondiscrimination Act (GINA) and the Patient Protection and Affordable Care Act (PPACA).
Shortly before PPACA was enacted, the IRS announced that for plan years beginning on or after January 1, 2010, a person liable for such taxes would be required to timely file a Form 8928 to self-report such failures. The due date varies based on the type of failure and person liable. A Form 7004 may be filed to obtain a six-month extension for filing the return, but the tax must be paid by the original deadline. Failure to timely file and pay taxes triggers a penalty of 5% of the unpaid excise tax per month late, up to 25%. Late payments are also subject to interest at the variable underpayment rate set by the IRS.
Can an employer assume that it is in good shape if it has an insured plan, a COBRA administrator, and/or an administrative services agreement? Not necessarily, and the exposure may be significant. For example, the 4980D tax is $100 per day per affected individual. We encourage group health care sponsors to review their insurance agreements and service agreements with respect to responsibilities and liability related to excise taxes, and to develop health care plan due diligence programs to timely detect and correct compliance failures. Most sponsors still have time to file a Form 8928 for 2011, but the clock is ticking ….
For those who would like more explanation about these requirements, we will focus on 4980B and 4980D. These provisions contain penalty caps and exceptions for various situations. 4980B and 4980D provide that no excise tax will be imposed for any period for which the IRS is satisfied the person otherwise liable for the tax did not know about the failure, and exercising reasonable due diligence, would not have known about the failure. In addition, no excise tax will be imposed if the failure was due to reasonable cause and not willful neglect; is corrected within 30 days of the date a person knew of a failure, or exercising due diligence would have known of a failure; and is corrected before notice of examination. The Form 8928 instructions provide that correction means retroactively undoing the failure to the extent possible, and placing any affected person in at least the same financial position he or she would have been in if the failure had not occurred. The IRS may waive part or all of the excise tax for a failure due to reasonable cause and not to willful neglect, to the extent that payment would be excessive relative to the failure.
The self-reporting guidance is set forth in the Form 8928 instructions, which shed little light on difficult questions regarding what constitutes a failure, when that failure is deemed to have occurred, who has to file, and under what circumstances.
The instructions require employers (and/or others, where applicable) to file if they are liable for taxes. The Form 8928 requires disclosure of failures in two categories: failures due to reasonable cause and not to willful neglect, and failures due to willful neglect or otherwise not to due reasonable cause. The Form is only required if tax is due, and the “tax due” line only addressed situations where the tax due is less than zero or greater than zero, not where the tax due is exactly zero. If a failure was not discovered despite reasonable diligence or was corrected within the correction period and was due to reasonable cause, is the employer required to file this Form? One would think the answer should be “no,” but the Form has a section for these $0 penalty failures, and the typical three-year statute of limitations on tax assessments might not start to run until a form is filed. Therefore, if you discover any failures, we encourage you to consult with your advisors.
Expansion of 4980D
Section 4980D imposes a nondeductible excise tax of $100 per day per affected individual for failure to comply with Code Chapter 100, group health plan requirements. For failures due to reasonable cause and not to willful neglect, this tax is capped at the lesser of ten percent of amounts paid to provide health care, or $500,0000. Section 4980D has been around for awhile, but has recently became more significant. First, GINA expanded the list of penalty triggers for plan years beginning on or after December 7, 2009; then self-reporting kicked in, and finally PPACA added Code Section 9815 to Chapter 100, with numerous provisions becoming effective in 2011.
It is fairly clear when a 4980B COBRA failure has occurred. But questions remain about when a 4980D failure occurs. Section 4980D imposes penalties only on the “employer,” and on the plan in the case of a multi-employer plan. This is distinct from 4980B, which also imposes liability on each person who is responsible for administering or providing benefits and whose act or failure to act caused the failure. The employer may or may not be the plan administrator. Does this mean that 4980D only relates to the design of the plan, or does this mean that an employer is also liable for administrative errors, regardless of who commits them? If it is the latter, at what point does an appealed incorrect claim denial become a failure?
Code Section 4980D provides an exception for insured plans, but it is limited. The exception applies only to small employer plans (at least two but not more than 50 employees, determined on a controlled group basis), and only where the failure is solely because of health insurance coverage offered by the issuer.
Employers and multi-employer plans are required to timely self-report compliance failures on the recently updated Form 8928. The 4980D deadline for employers is the due date for the employer’s tax return, without regard to extensions. The 4980D deadline for multi-employer plans is the last day of the seventh month after the plan year end. (The “When to File” instructions seem to suggest that multiple employer welfare arrangements and “other persons responsible” might have liability and filing responsibility, as is the case for 4980B, but this seems inconsistent with the provisions of Section 4980D.)
The number of health care plan excise tax triggers continues to grow. For example, the preventive care guidelines are continuously being updated, and enforcement of nondiscrimination provisions will begin after guidance is issued. As plans lose their grandfathered status (accidentally or deliberately), they become subject to more requirements. While we would like to be able to assume that insurers and service providers are properly addressing all of these health care compliance requirements, we encourage employers to conduct their own due diligence.