January 20, 2010
Until now, no mandate or procedure has existed for employers to self-report excise taxes due under the Internal Revenue Code for violations of the duties imposed by COBRA, HIPAA and other laws relating to group health plans. The IRS has seldom assessed these excise taxes on audit.
Beginning in 2010, however, recent Internal Revenue Service regulations require employer-sponsors of group health plans to self-report and pay any excise taxes arising out of their compliance failures.
Responsible parties (see below) will self-report these taxes on new Form 8928. The IRS has issued a draft version of Form 8928, found at http://www.irs.gov/pub/irs-dft/f8928--dft.pdf. The draft form is expected to be finalized in time for 2010 reporting.
Failure to report and pay under the new rules could result in continuing and increasing tax-related liabilities for employers without the benefit of the running of a statute of limitations on assessment.
Excise Taxes Affected
The excise taxes affected by the new reporting requirements are those covering violations of the following:
- HIPAA (including portability, access, renewability and nondiscrimination requirements)
- Genetic Information Nondiscrimination Act (“GINA”)
- Mental Health Parity
- Newborns’ and Mothers’ Health Protection Act
- Michelle’s Law (dependent student coverage for certain medically necessary leaves of absence)
- Health Savings Accounts (“HSAs") (comparable employer contribution rules)
- Archer MSAs comparable employer contribution rules
Excise Tax Liabilities
As with COBRA violations, the excise tax for most covered violations typically is $100 per day per individual affected by the failure. The excise tax for violations of the comparable employer contributions requirements for HSAs and Archer MSAs is generally 35% of the amount contributed by the employer to such accounts for all employees for the year.
Defenses to Excise Tax Liability
Taxes are not generally deemed to be due in the case of failures that are not discovered after the exercise of reasonable diligence or failures that are due to “reasonable cause” and not willful neglect and that are timely corrected or “undone” from a financial standpoint. Certain special exceptions also are provided for HSA and Archer MSA violations where the excise tax would be excessive for the particular violation.
When Form 8928 Must Be Filed
Single employer plans reporting excise taxes relating to failures under COBRA, HIPAA, GINA, Newborns’ and Mothers’ Health Protection Act and Michelle’s Law generally must file on the new Form 8928 by the due date (without extensions) for filing the federal tax return for the party deemed responsible for the excise tax under the Code. That party could be the employer, an insurer or third-party administrator. Different filing deadlines apply to multi-employer plans and to violations of the other mandates covered by the new reporting requirements.
Consequences of Failure to File
As with most tax reporting obligations under the Internal Revenue Code, an employer’s failure to report and pay required excise taxes for COBRA or other violations can result in penalties and interest, unless it is shown that the failure is due to reasonable cause and not to willful neglect. In addition, the failure to file a return for excise taxes that are due will likely prevent the normal three-year statute of limitations on tax assessment from beginning to run. This makes it more important than ever for employers to provide for and monitor compliance with the COBRA notice requirements and the other group health plan mandates in the Code.
What Responsible Parties Need to Do Soon
Responsible parties, such as employers, insurers or third-party administrators, must now more than ever take steps to comply with the underlying requirements of law whose violation triggers the excise tax liability. These steps include:
- Identifying the specific mandates in underlying health plan law and creating checklists and compliance sheets to address those requirements;
- Implementing specific periodic review procedures to comply with the underlying legal requirements;
- In the next several months, reviewing benefit arrangements subject to legal requirements to form a baseline analysis for compliance; and
- Making sure vendors have taken affirmative steps to prevent failures leading to an excise tax obligation and evaluated the effectiveness of those procedures.
The Employee Benefits practice group at Jackson Lewis can work with employers and other responsible parties to help them comply with the legal requirements.
IRS Circular 230 Disclosure: We inform you that any U.S. federal tax advice contained in this communication (including any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed therein. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)