New Tax Return Requirement for Certain Group Health Plan Mandates

Benefits Brief
December 21, 2009

Under new regulations issued by the Internal Revenue Service (IRS), employers who sponsor group health plans that fail to comply with various federal group health plan mandates, including the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Heath Insurance Portability and Accountability Act (HIPAA), will generally be required to self-report and pay excise taxes for those failures. The new filing obligation becomes effective after 2009.

While many of the group health plan mandates are part of ERISA, the Internal Revenue Code also imposes excise taxes for various compliance failures. Until now, however, there was not an affirmative obligation to report and pay excise taxes on any failures. Effective next year, plan sponsors will be required to file a new IRS Form 8928 and pay excise taxes with respect to violations of various group health plan laws including: (1) COBRA; (2) HIPAA, which includes both the portability provisions (relating to preexisting condition exclusions, certificates of creditable coverage and special enrollment requirements) and the nondiscrimination rules, including the new Genetic Information Nondiscrimination Act (GINA); (3) the Mental Health Parity Act; (4) the Newborns’ and Mothers’ Health Protection Act; (5) required group health coverage of dependent students on medically necessary leaves of absence (or reduced schedules) from post-secondary school (Michelle’s Law); and (6) Health Savings Account (HSA) and Archer Medical Savings Account (Archer MSA) contribution comparability requirements.

The amount of excise tax varies based on the failure involved, but for most failures (other than those relating to HSAs and Archer MSAs), the excise tax is generally $100 per day per affected individual during a “noncompliance period,” which generally begins on the date of the failure and ends when the failure is corrected. In the case of a COBRA violation, the noncompliance period will end no later than six months after the end of the otherwise applicable period of continuation coverage. Where the failure is the result of reasonable cause and not willful neglect, the maximum excise tax for a single employer plan is the lesser of $500,000 or 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for the group health plan. In addition, if a failure is due to reasonable cause (and not willful neglect) and is corrected within a 30-day period beginning on the first date that the employer or administrator, as applicable, knew or exercising reasonable diligence should have known of the failure, no excise tax will apply. Correction requires retroactively undoing the failure to the extent possible and placing the individual to whom the failure relates in a financial position that is as good as the individual would have been in had the failure not occurred. It remains unclear whether the benefit of this relief will require any reporting on Form 8928 (no instructions to the Form have been published and the regulations do not address the issue). Larger excise taxes can apply when the corrections are not made prior to IRS examination.

Different penalty structures apply for noncompliance with the HSA and Archer MSA comparable contribution requirements.

The Form 8928 will be due on or before the due date for filing the sponsor’s federal income tax return. Employers liable for excise taxes relating to HSAs and Archer MSAs must file by April 15th following the calendar year in which noncomparable contributions were made. The sponsor’s federal income tax return extension will not extend the deadline for Form 8928. Instead, a separate request must be filed using Form 7004. The extension, which does not extend the time for paying the tax, is good for 6 months. A failure to timely file or pay any tax due may result in additional penalties.

Although the Department of Labor has been heavily auditing in the COBRA and HIPAA area for the last few years, the introduction of a new tax return filing obligation raises the stakes for plan sponsors and administrators with respect to group health plan compliance. As a result, it may be appropriate for sponsors and administrators to undertake a compliance review. If you would like a copy of our welfare benefit compliance checklist or have any questions, please contact one of us. 

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