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Potential Employer Excise Tax Penalties
Potential Employer Excise Tax Penalties
Imagine if you had to also pay excise tax penalties for not following the rules.

It’s bad enough to pay penalties by not meeting the requirements of the PPACA, but imagine if you had to also pay excise tax penalties for not following the rules. It could happen and impact a small or mid-size company’s bottom line significantly. I feel the following explanation with excerpted material from Danielle Capilla,Chief Compliance Officer at United Benefit Advisors (UBA) for which our firm is a Charter Member, would be useful to many Hampton Roads businesses.

The excise tax penalties apply to all plans, regardless of size. Your small or mid-sized business should self-report any failure to comply with a wide range of requirements. Since 2010, the IRS has said that employers and plan administrators should self report on various group health plan requirements, including requirements related to COBRA, HIPAA, Mental Health Parity, as well as the comparable contribution requirement for health savings accounts (HSAs). With the passage of PPACA, employers and plan administrators are now expected to self-report these compliance failures using Form 8928. Historically enforcement of the filing requirement and collection of the excise tax has been light, but the IRS is now indicating that it expects employers to report failures and pay fines as applicable.

The excise tax is imposed on the plan sponsor, which generally is the employer. In the case of a multiemployer plan, the plan sponsor may be the employee organization, board of trustees, or committee. With COBRA and some PPACA violations, the tax may instead be imposed on the third-party administrator or insurer responsible for the failure.

The penalty and the excise tax vary based on the type of violation. For example, potential COBRA, HIPAA and related violations, which come with an excise tax of $100 per day per affected individual, include the failure to:

  • Offer continuation (COBRA) coverage to a qualified beneficiary;
  • Provide the required level of pediatric vaccine coverage;
  • Comply with special enrollment requirements (and previously with the limitations on preexisting condition exclusions and the requirement to issue certificates of creditable coverage);
  • Provide the required 48-hour and 96-hour hospital length of stay in connection with childbirth for mothers and newborns; and
  • Provide parity in mental health and substance use disorder benefits.

Most businesses are probably aware of some of the PPACA requirements because of the extensive information and discussion on them, such as pre-existing condition exclusions, providing employer contributions for individual plans, and extending dependent coverage until age 26. The same excise tax ($100 per day per affected individual) applies to these potential PPACA violations, as well as the following:

  • Discrimination against participants and beneficiaries based on health status
  • Discrimination in coverage for services from certain health care providers
  • Cost-sharing limitations on essential health benefits
  • Eligibility waiting periods in excess of 90 days
  • Failure to provide coverage for individuals participating in approved clinical trials
  • Imposing lifetime or annual dollar limits on essential health benefits
  • Most rescissions of coverage
  • Failure to provide first-dollar coverage for preventive health services
  • Summary of benefits and coverage failures
  • Failure to meet health plan reporting requirements
  • Failure to offer required health plan claim and appeals protections
  • Failure to provide required patient protections relating to the selection of a primary care provider, coverage of emergency services, and access to pediatric, obstetrical and gynecological care providers

What can you do now about excise tax for violations of any of the group health plan (COBRA, HIPAA, PPACA, etc.) rules?

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 failure is discovered, no excise tax will be imposed if the failure was due to reasonable cause and the failure is corrected within 30 days after the date on which the error became known or should have been known. For these purposes, "correction" means retroactively fixing the failure (to the extent possible) and putting any affected individual in the same financial position as he or she would have been if the failure had not occurred.

Another type of potential violation involves the HSA comparable contribution rules.  If the HSA comparable contribution rules are violated, the tax is generally 35% of the aggregate amount contributed by the employer to the HSA of all employees for the calendar year. Keep in mind though, that if your company contributes to an HSA through a section 125 plan, this rule does not apply for your company.

The deadline for reporting the failure and paying the tax generally is the deadline for filing the plan sponsor's federal income tax return. In the case of a multiemployer plan, the deadline is the last day of the seventh month following the close of the plan year. However, the deadline for reporting and paying the tax for violating the HSA comparable contributions requirements is the 15th day of the fourth month following the calendar year in which the non-comparable contributions were made. Plan sponsors may file Form 7004 to obtain an automatic six-month extension for filing the Form 8928, but this will not extend the deadline for payment of the excise taxes.

 If a plan sponsor fails to report and pay excise taxes when due, the IRS may assess 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. In addition, if the IRS discovers the failure during an audit, minimum penalties are significantly increased.

Discussing the value of the HSA as well as timelines and requirements for all aspect of your plan with not only your dedicated in-house benefit specialist or HR Director, but also with your advisor can save a great deal of time and money. We assist our clients to stay on top of deadlines and opportunities concerning the issues, which is critical when you consider what any excise tax penalty can do to your bottom line.

Krys Reid, president of Tower Benefit Consultants headquartered in Virginia Beach, provides individual and employee benefit services. He can be reached at 424-2493 or visit

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