I wince whenever I hear the phrase “small business.” I’m tired of the hackneyed and vapid references to small employers used to extoll half-baked policies or self-serving goals. “We need to focus on small businesses who are our future and the engine of our democracy.”
Rarely does the phrase get used by folks actually concerned with the well-being of small businesses. I usually check for my wallet whenever someone starts talking to me about the needs of my small business. The conversation seldom leads to an improvement in my life.
As I contemplate the consequences of the regulatory battles over association health plans, I can’t help but wonder what small employers are supposed to believe. Most associations provide health plan benefits primarily to small employers. Until federal health care reform, Washington associations were regulated as large group plans exempt from small group insurance market reforms.
With federal reform, it’s very hard for associations to qualify as “bona fide” under ERISA and continue to provide small group coverage as though the coverage were exempt from small group reforms. When insurance producers market “large group” association plan coverage to small employers, I also wonder whether insurance producers explain the penalties for employers providing the wrong benefits to employees. What happens if the association is wrong about selling large group coverage? Whoops?
EVERY EMPLOYER THAT SPONSORS A GROUP HEALTH PLAN THAT FAILS TO SATISFY FEDERAL REFORMS IS SUBJECT TO AN EXCISE TAX OF $100 PER DAY PER AFFECTED INDIVIDUAL ($36,500 for a whole plan year). The IRS code provision provides in part:
26 USC §4980D. Failure to meet certain group health plan requirements
(a) General rule There is hereby imposed a tax on any failure of a group health plan to meet the requirements of chapter 100 (relating to group health plan requirements).
(b) Amount of tax
(1) In general. The amount of the tax imposed by subsection (a) on any failure shall be $100 for each day in the noncompliance period with respect to each individual to whom such failure relates.
(2) Noncompliance period. For purposes of this section, the term “noncompliance period” means, with respect to any failure, the period—
(A) beginning on the date such failure first occurs, and (B) ending on the date such failure is corrected.
The requirements of “chapter 100” referenced in the tax code include the federal health insurance market reforms referenced in 26 USC §9815.1 among other provisions, such as mothers and newborns, mental health and substance abuse, etc.
Luckily, federal tax law exempts small employers who provide employee benefits by purchasing a plan from an insurance company.
(d) Tax not to apply to certain insured small employer plans
(1) In general In the case of a group health plan of a small employer which provides health insurance coverage solely through a contract with a health insurance issuer, no tax shall be imposed by this section on the employer on any failure (other than a failure attributable to section 9811) which is solely because of the health insurance coverage offered by such issuer. [Emphasis added]
Question – If a small employer purchases coverage from an association claiming to be a “bona fide” large group that fails to satisfy small group market reforms, will the employer be liable for the excise tax? Would your answer change if I gave you the following additional information from the statute?
(B) Specified multiple employer health plans
(i) In general In the case of failures with respect to a specified multiple employer health plan [association plan / MEWA], the tax imposed by subsection (a) for failures during the taxable year of the trust forming part of such plan shall not exceed the amount equal to the lesser of—
(I) 10 percent of the amount paid or incurred by such trust during such taxable year to provide medical care (as defined in section 9832 (d)(3)) directly or through insurance, reimbursement, or otherwise, or
For purposes of the preceding sentence, all plans of which the same trust forms a part shall be treated as one plan.
(ii) Special rule for employers required to pay tax If an employer is assessed a tax imposed by subsection (a) by reason of a failure with respect to a specified multiple employer health plan, the limit shall be determined under subparagraph (A) (and not under this subparagraph) and as if such plan were not a specified multiple employer health plan.
Bonus Question – What liabilities does a small employer face when the employer knows the plan purchased from the association fails small group benefit mandates such as out of pocket, annual, or lifetime limits?
Sorry, this is a trick question. The small employer owes nothing if the employer couldn’t know by exercising reasonable diligence.
(c) Limitations on amount of tax
(1) Tax not to apply where failure not discovered exercising reasonable diligence
No tax shall be imposed by subsection (a) on any failure during any period for which it is established to the satisfaction of the Secretary that the person otherwise liable for such tax did not know, and exercising reasonable diligence would not have known, that such failure existed.
Trickier Question – What does the small employer know if the Insurance Commissioner declares that an association is not “bona fide” and not entitled to provide large group coverage?
Should the employer seek the addition of an indemnification provision in its agreement with the association for any penalties or costs associated with noncompliance with the Affordable Care Act (ACA)?
Should the employer simply buy an ACA compliant small group plan if the employer is unsure of the bona fide status of the association?
For answers, I typically turn to my insurance broker; he cares a lot about my small business.
Just to be really sure though, small businesses should ask any association claiming bona fide, large group status to provide a legal opinion that insured, small employer members do not face liability under IRS Code 26 USC §4980D.
Might as well check that box off the “to do” list in the new year; right above the “play with fire” box.