New IRS Rule Could Fine 546K Employers $500K/Year - for Helping Pay for Employees' Health Insurance

Craig Bannister | July 1, 2015
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An obscure IRS rule takes effect today under which small businesses that get caught helping their workers buy insurance or pay medical bills can be fined 18 times more than larger employers that don’t any provide coverage at all – up to $500,000 a year.

Under IRS Notice 2013-54, “these employer payment plans are considered to be group health plans subject to the market reforms” – and do not comply with the Affordable Care Act.

“It’s the biggest penalty that no one is talking about,” said National Federal of Independent Businesses (NFIB) Policy Director Kevin Kuhlman.  “The penalty for compensating employees for healthcare-related expenses is enough to destroy most small businesses.”

This is a rigid and thoughtless bureaucratic rule that undermines the purpose of the law, and it ought to be repealed immediately,” Kuhlman said.

Under the rule spawned by the Affordable Care Act, employers who do not offer a group health plan, but give their workers additional pay to compensate for the purchase of health insurance or direct medical expenses can be fined $100 per day, per employee.  Over the course of a year that’s $36,500 per employee up to $500,000 in total. 

The penalty on businesses for failing to comply with the employer mandate is “only” $2,000 per year.

More than a half million small business employers (1-50 employees) could be hit with the $500,000 IRS fine, which kicks in today. NFIB research shows that 60 percent of the nation’s roughly 6.5 million small business employers do not provide health insurance – but, 14 percent of those insurance reimburse their workers, instead.  That comes out to about 546,000 businesses that could be hit with the massive fines.

“It’s hard to believe Congress or the President intended to punish employers much more severely for actually helping their workers,” said Kuhlman.  “Nevertheless, that’s the consequence and most small businesses don’t know it.”

“Reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headache of setting up a costly group plan,” said Kuhlman.  “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.”

Congress could remedy the situation by repealing the IRS rule.  There is legislation in both houses awaiting action (S. 1697/H.R. 2911).

The IRS is initially relying on employers to self-report violations using IRS Form 8928, but enforcement will amplify as it begins conducting business audits to ensure compliance.

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