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By now, most business owners know about the yearly $2,000 per-employee fine they would face for not securing health coverage for their employees under the Affordable Care Act.

But there is even a larger fine that threatens under recent regulations issued by the IRS – and it’s not for failing to secure coverage.

It’s for helping them secure coverage from a public exchange or open private market. And it applies to ALL employers, even those that are small enough to not be required to provide insurance for their full-time employees under the ACA’s employer mandate.

The fine? Up to $36,500 a year for each worker!

Under the new IRS regulations, issued July 1, 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 applies whether the reimbursement is considered a before-tax or after-tax contribution.

 

Small businesses, beware!

Employers with fewer than 50 full-time employees are the ones that really need to watch out for this law, since the employer mandate does not apply to them.

The rule appears nowhere in the ACA, yet the IRS created the penalty while writing the regulations that implement that landmark health insurance reform law.

In essence, the National Federation of Independent Business has come out against the regulations, writing in a blog:

“The rule punishes small businesses for providing the only health insurance support many can afford – a contribution to help employees pay premiums for their individual or family health insurance policies or to help finance direct payment for medical services.

“Reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headaches of setting up a costly group plan,” the blog quoted Kevin Kuhlman, policy director for the association, as saying.

“There’s no real justification for penalizing small businesses that do what the law’s strongest supporters claim to want, which is to help employees obtain coverage or pay medical bills,” he said.

Here are some things you need to know about the regulations:

  • The $100 per-employee per-day penalty cannot be assessed on employer payment arrangements that have only one participating employee. Therefore, your business can still use such an arrangement to reimburse one employee for his or her individual health insurance premiums without the penalty.
  • The IRS had been offered a temporary penalty exemption to small employers that reimburse or pay employee health premiums between Jan. 1, 2014 and June 30, 2015. A small employer is defined as one with fewer than 50 full-time employees (including full-time equivalent employees) during the prior year. That relief has now expired.
  • Many S corporations have set up employer payment arrangements to cover individual health policy premiums for employees who also own more than 2% of the company stock (more-than-2% shareholder-employees).

IRS Notice 2015-17 exempts such plans from the $100 per-employee per-day penalty for health premiums reimbursed or paid by S corporations between Jan. 1, 2014 and Dec. 31, 2015. The bottom line: through year-end, there is no risk of incurring the penalty for S corporation employer payment arrangements that benefit only more-than-2% shareholder-employees. However, S corporation employer payment arrangements that benefit other employees are still exposed to the penalty.

 

Is help on the way?

The business community has agitated and made its concerns heard by lobbying for a fix on Capitol Hill, and legislation to repeal the regulations has been introduced in both houses of Congress.

Rep. Charles Boustany has introduced legislation in the House, (H.R. 2911), and Sen. Charles Grassley in the Senate, (S. 1697), to remedy the problem. Both bills await congressional action.

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