New Rules Require Excise Tax Reporting for Group Health Plans

The IRS recently issued final regulations requiring employers to self-report and pay excise taxes for non-compliance violations in regard to health and welfare benefit plans. The new requirements, which are effective January 1, 2010, cover excise tax penalties for federal mandates (such as COBRA and HIPAA), as well as Health Savings Account (HSA) and Archer Medical Savings Account (MSA) comparability rules.

While these federal rules have always carried excise penalties under the Internal Revenue Code for non-compliance, the IRS has not imposed these taxes in connection with IRS audits and there was no method for employers to self-report the taxes. However, employers who are subject to the excise tax penalty can now report and pay using the new IRS Form 8928. The IRS has not yet made this form available; however, a draft Form 8928 can be located on the IRS website.

The following is a brief summary of the excise tax penalties and the stipulations of the new rules:

Group Health Mandates
The following group health mandates include an excise tax penalty of $100 per individual, per day of non-compliance:

There are some exceptions to the excise tax penalty for failure to comply with the mandates listed above:

  1. Inadvertent Failure
    The excise tax does not apply for any period during which the employer “upon exercise of due diligence” did not know that there was a failure to comply. The period of noncompliance begins with the first date the employer knew or should have known of the failure upon the exercise of due diligence.

  2. Self-Correction
    The excise tax does not apply where the failure is due to reasonable cause (and not willful neglect) and is timely corrected. A failure is corrected if it is retroactively undone to the extent possible and any affected person is placed in a financial position as good as he or she would have been had the failure not occurred.

Form 8928 and the excise tax penalties regarding non-compliance with group health mandates are due on or before the due date for filing the employer’s federal income tax return without extension. It is important to note that an extension to file the federal tax return DOES NOT extend the date for filing Form 8928 and paying the excise tax. Generally, it is the employer who is responsible for paying and reporting excise tax penalties. Where there is a COBRA compliance failure, however, insurers or TPAs may be responsible in certain situations.

HSAs and Archer MSAs
Failure to comply with the comparability requirements for HSAs or Archer MSAs will result in a 35% excise tax on all contributions to the Archer MSA or HSA the employer makes for the calendar year.

The excise tax regulations also include final rules on comparable employer contributions to HSAs. These rules, which are similar to the proposed regulations issued in July 2008, provide clarification regarding contributions to HSAs of non-highly compensated employees, as well as maximum HSA contributions for employees who become HSA-eligible mid-year. The HSA comparability rules do not apply to HSA contributions an employer makes through a Section 125 cafeteria plan. However, contributions made to an HSA through a cafeteria plan will be subject to the Section 125 nondiscrimination rules.

There are also exceptions to the excise tax penalty for Archer MSAs and HSAs:

  1. Waiver of the Excise Tax
    In situations where the excise tax imposed is excessive relative to the failure involved, the 35% excise tax can be waived by the IRS. However, the IRS has issued no guidance on the process to apply for a waiver.
  2. HSA Self-Correction
    Where an employer fails to meet the HSA comparability requirements, that failure may be self-corrected by making additional contributions, plus reasonable interest, on or before April 15 of the following year. If this corrective action is taken, the employer can avoid the 35% excise tax penalty.

For failure to comply with the comparability requirements, the Form 8928 and excise tax penalties are due on or before the 15th day of the fourth month following the calendar year in which the non-comparable contributions were made.

Penalties for Failing to File and Pay
Failure to file Form 8928 and pay the excise tax before the due date specified by the regulations will result in penalties and interest unless the failure is due to reasonable cause (versus willful neglect).

If you have any questions about these rules, please contact our office at 919-403-1986.


Important Notice: Hill, Chesson & Woody does not engage in the practice of law, accounting, or medicine. Therefore, the contents of this communication should not be regarded as a substitute for legal, tax, or medical advice.

November 24, 2009

Hill, Chesson & Woody Employee Benefit Services

194 Finley Golf Course Rd, Suite 200,
Chapel Hill, NC 27517
Phone: 919.403.1986
Fax: 919.869.2063

www.hcwbenefits.com