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IRS Penalty Update: Church Health Care Arrangements and ObamaCare

Church Finance Basics

A notice issued by the IRS this month provides much-needed "transitional relief" from the $100 per day, per employee, penalty mandated by the Affordable Care Act (ObamaCare) for employer healthcare arrangements. Watch as church law and tax expert Richard Hammar explains how this important development affects your church.

Key Points:

1. Employer payment plans whereby a church pays for or reimburses employee health insurance premiums trigger a significant penalty of $100 per day per affected employee. That’s $36,500 per year per employee. This penalty applies to any employer payment plan adopted since January 1, 2014.

2. Employers with fewer than 50 employees since January 1, 2014 are eligible for transitional relief. They will not be assessed the $100 per day penalty for 2014 and the first half lf 2015. However, the penalty will be imposed thereafter, so you should discontinue any existing employer payment plan and consider other means of providing health coverage for your employees. One way that was approved by the IRS in Notice 2015-17 is to implement a plan that increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage.

3. “Large employers” with 50 or more full-time employees should terminate their employer payment plan immediately since they are not eligible for transitional relief from the $100 per day per employee penalty. It is imperative that these employers consult with a tax professional to minimize or avoid the risk of triggering the penalty.

4. In the past, some employers thought that they could avoid the $100 per day penalty by treating their payment or reimbursement of employee health insurance as a taxable fringe benefit reported on Forms W-2 and 941. Employees of churches that followed this practice in 2014 should discuss with a tax professional the possibility of claiming a tax refund. The reasoning is that employer payment plans technically remain a nontaxable fringe benefit. This tax treatment was not changed by the Affordable Care Act. But few, if any, employers will continue providing this benefit to employees because it will trigger the $100 per day penalty. Employers with fewer than 50 employees are eligible for transitional relief from this penalty for 2014 and the first half of 2015. This means that employees whose W-2 reported the amount of their employer’s payment or reimbursement of personal health insurance may be entitled to a refund. Check with your tax professional for further details.

5. The $100 per day penalty applies to all employers, including but not limited to churches. Employer payment plans have been popular not just among churches, but also among many small for-profit employers. As a result, as more employers become aware of this penalty, it is likely that Congress will be under mounting pressure to provide permanent relief.

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