Employers who sponsor group health plans now have a duty to self-report certain regulatory plan failures and pay excise taxes where such failures are not corrected in a timely fashion once discovered, or are due to willful neglect.
The Internal Revenue Code (the Code) imposes excise taxes for failure to comply with COBRA, HIPAA, and other federal group health plan mandates. The IRS has not historically been very active in examining health plans for compliance with these rules or in assessing excise taxes when noncompliance has been discovered. However, recently issued IRS final regulations now require employers to self-report violations of these rules and pay related excise taxes, where appropriate under the Code and applicable regulations.
The employer (or in some cases, the insurer, HMO or third-party administrator) must report health plan compliance failures annually on IRS Form 8928 (“Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code”). This form and its corresponding instructions provide much of the substantive guidance for compliance with the new self-reporting requirements.
The excise taxes imposed can be steep. For example, violations of COBRA, HIPAA and GINA can result in excise taxes of $100 per day per individual affected. In order to avoid these excise taxes, compliance with group health plan mandates is key.
What Types of Violations Are Covered by the New Reporting Obligation?
Excise taxes may be imposed for failure to meet certain federal health plan requirements, including:
- Federal health care continuation requirements (COBRA).
- Health plan portability and nondiscrimination requirements (HIPAA).
- Mental health parity (MHPAEA).
- Minimum hospital stays for newborns and mothers (Newborns’ and Mothers’ Health Protection Act).
- Genetic nondiscrimination requirements (GINA).
- Coverage of dependent students on medically necessary leaves of absence (Michelle’s Law).
- Health savings account (HSA) and Archer medical savings account (Archer MSA) contribution comparability requirements.
The new self-reporting requirements apply to noncompliance with any one of these requirements.
When Does the Reporting Obligation Become Effective?
The new reporting obligation is effective for plan years beginning on or after Jan. 1, 2010.
When Are the Payment of the Excise Tax and Filing of Form 8928 Due?
In all instances, the excise tax must be paid to the IRS at the same time and place that Form 8928 is filed. However, the deadline for reporting on Form 8928 will vary depending on the type of violation. Employers must file and report violations on Form 8928 and remit payment:
- On or before a liable employer’s (or in some cases, insurer, HMO or third-party administrator’s) income tax return filing due date, for violations related to COBRA, HIPAA, GINA, MHPAEA, the Newborns’ and Mothers’ Health Protection Act, and Michelle’s Law. An extension to file income taxes does not extend the date for filing Form 8928.
- On or before the April 15th following an impermissible contribution, for violations of the HSA or Archer MSA comparability rules.
How is the Excise Tax Amount Determined?
The amount of excise tax imposed for a violation remains unchanged by the new regulations and will vary depending on the type of violation.
- The excise tax for noncompliance with the rules related to COBRA, HIPAA, GINA, MHPAEA, the Newborns’ and Mothers’ Health Protection Act, and Michelle’s Law generally is $100 per individual per day (for each individual to whom the violation relates for each day of noncompliance). However, this excise tax is subject to certain limits and other special rules.
- The excise tax for noncompliance with the rules related to HSA and Archer MSA comparable employer contributions is generally 35% of the aggregate employer contributions made to all HSAs or Archer MSAs during the applicable calendar year.
How Can the Excise Tax Be Avoided?
The excise tax for violations of any of the group health plan rules other than the comparable contribution requirements for HSAs and Archer MSAs can be avoided in a variety of circumstances.
- First, no excise tax is imposed during the period when the employer did not know, or exercising reasonable diligence would not have known, a plan failure existed.
- Second, once the plan failure is discovered, no excise tax will be imposed if the failure was due to reasonable cause and the failure is “corrected.”
For these purposes, “correction” means (1) retroactively fixing the failure (to the extent possible) within 30 days of the first date on which the error was known or should have been known; and (2) placing any affected individual in at least the same financial position as he or she would have been had the failure not occurred. Also, the IRS may waive all or part of the excise tax if the amount of tax is deemed excessive relative to the failure involved, and the failure was due to reasonable cause and not due to willful neglect. In addition, governmental plans, church plans and certain small plans may be exempt from the excise tax under certain circumstances.
In the case of failures to comply with the comparable contribution requirements for HSAs and Archer MSAs, the excise tax can be waived. The IRS may waive all or part of the excise tax if the amount of tax is deemed excessive relative to the failure involved, and the failure was due to reasonable cause and not due to willful neglect.
What If a Plan Failure Was Due to Reasonable Cause and Was Promptly Corrected?
It still must be reported on Form 8928. Form 8928 and its instructions plainly contemplate that plan failures must be reported even when they were corrected fully in a timely fashion, such that no excise tax is due.
What Is The Penalty For Not Timely Filing Form 8928?
If a liable entity fails to report and pay excise taxes in a timely manner, the IRS may increase the taxpayer’s liability by assessing penalties and interest, unless the failure to file and pay is due to reasonable cause and not willful neglect. The penalty for filing Form 8928 late is 5% of the unpaid excise tax for each month the form is late, up to a maximum of 25%. A separate penalty calculation applies for late payment of the excise tax, assuming the form has been filed.
What Should I Do Now?
This new reporting obligation makes compliance with group health plan requirements more important than ever. To avoid excise taxes under this new self-reporting regime, employers and administrators of group health plans should have procedures and processes in place that are reasonably designed to ensure compliance. If plan failures nonetheless occur, the employer and other responsible parties must promptly take action to correct the violation within 30 days, or face expensive excise tax penalties.
For assistance complying with the new excise tax and reporting rules or group health plan administration generally, please contact the authors or any member of the McGuireWoods Employee Benefits team.