Due Diligence and ACA: A CPA Raises Some Tough Questions
Editor’s Note: Last January, Janet Hagy, CPA (and AICPA Tax Section volunteer) wrote a popular blog about her concerns regarding new rules for health reimbursement arrangements and their impact on her staff. We asked Ms. Hagy to give us an update and also discuss the Affordable Healthcare Act compliance concerns she has as a practitioner for the current tax season.
What I have learned in the last year about the ACA adds extra concerns to this already complicated tax season. We have two major compliance challenges right now – coverage documentation and standalone health reimbursement arrangements (HRAs). Otherwise, penalties, higher fees and more frustration could be waiting for many of us.
The first issue is that we as CPAs have sign-off on whether our individual clients had the required health insurance for each month in 2014 for all household members. We are probably not going to receive any 2014 forms 1095-B or 1095-C from employers or insurance companies substantiating what our clients tell us about their coverage, since these forms are voluntary for 2014 and do not become mandatory until 2015.
The Internal Revenue Service has provided us with Return Preparer Best Practices for the premium tax credit reconciliation and for help determining if taxpayers have qualifying coverage, both of which can be found, along with other resources, at the AICPA Health Care Resource Center. If the clients purchased insurance through the Marketplace, they will receive Form 1095-A from the Marketplace proving they do have minimum essential coverage (MEC). It will also provide the information needed to determine the premium tax credit. So, the substantiation for taxpayers who purchased insurance on the Marketplace will be much easier, although it may still be challenging for newly married or divorced taxpayers.
However, definitively determining if our clients have MEC will still be a challenge. At a minimum, I need to ask my client if all persons listed on the tax return as taxpayers and dependents had minimum essential coverage for all months or for what periods they were not covered. For the sake of expediency, they would probably say yes to any question I pose without consulting the policy or their company’s HR departments. Is this good enough?
Do I need to get a copy of the policy and check for compliance? Who will be at fault two years from now when the IRS determines that they did not have MEC and therefore owe tax and a penalty? I doubt that the client will quietly accept responsibility or that the IRS will fail to impose preparer penalties if I miss this.
Also, most of my clientele will not qualify for Marketplace premium assistance. My tax organizer only asks whether the taxpayers were covered by insurance for all of 2014. I do not think a simple Yes or No answer is going to be sufficient. But how far do I have to go to protect myself from the IRS and my clients from potential additional tax and penalties?
For those clients who did not have coverage, on purpose or by accident, we may have to help our clients determine if they qualify for an exemption. The list of possible exemptions is astonishing, and contains some surprisingly broad hardship categories. While some exemptions are applied for directly on Form 8965, Health Coverage Exemptions, others require applying through the Marketplace. If the application is accepted, an exemption certificate number will be mailed to the taxpayer.
The IRS has advised that if the exemption certificate number is not received in time, the return should be filed with “pending” placed in the code section. If the exemption application is accepted, no further action is required. However, if the exemption application is rejected, an amended return may be necessary. Prior to filing an amended return, a rejection may be appealed but may take months to resolve. My clients are not going to be thrilled with the additional hassle and especially not with the additional professional fee.
The second major issue is that some small employers are still reimbursing employees for insurance premiums paid directly by the employee and perhaps other medical expenses under a standalone HRA. While this was acceptable practice in the past, starting in 2014, HRAs constitute “group health plans” that do not meet MEC because they impose a dollar limit on coverage (per guidance issued by the Labor and Treasury departments). Even if the employer grosses up and includes the reimbursed premiums in taxable wages, the employer will be subject to penalties of up to $100 per day per employee for having a noncompliant plan.
I terminated my company standalone HRA plan at the end of 2013. My employees relied on this benefit and it was only fair to compensate them for the loss. Shortchanging employees due to changes in the law would have undermined my ability to retain valuable staff. Now I find out that the U.S. Department of Labor has gone so far as to suggest that those employers who terminated their coverage and then increased the compensation of formerly covered employees by the amount of benefit lost still have a noncompliant “group plan” subject to the penalty. And then there is that pesky Patient-Centered Outcome Research Institute fee as well – this is an annual fee on self-insured plans to support the PCORI.
Even after advising my business clients about this issue, I expect to see a few of these types of employee reimbursement payments when I prepare some business returns. I will have to advise my clients to correct all of their payroll reporting for 2014 if they did not include the premiums or standalone HRA payments in the employee’s wages. What is my responsibility for computing and reporting the “group health plan” and PCORI penalties?
I wish I had answers to all of these questions right now. Each firm will have to decide how to deal with these issues as they arise. A supplemental acknowledgement signed by the client may cover our professional liability. But we will still have some mighty unhappy clients if we fail to address all of the possible avenues for noncompliance.
Janet Hagy, CPA, Shareholder, Hagy & Associates, P.C. Janet has been in public accounting for almost 40 years providing tax planning and compliance services, primarily for small to medium-sized businesses and high net worth individuals. Janet is a member of the AICPA IRS Relations & Advocacy Committee and the Texas Society of CPAs.