New Healthcare Penalty Hits Small Businesses Hard

Most Americans are aware of the basics involved in the Affordable Care Act, including an employer mandate that requires certain companies to provide health insurance to employees or face a penalty. However, a lesser-known rule just took effect on July 1, 2015 that is hitting small business owners with a significant penalty.

According to the new IRS rule, small businesses that either reimburse their employees for individual health insurance premiums or directly pay for these premiums now face a fine of $100 per employee per day. This means an employer could be on the hook for an annual penalty of $36,500 per employee – easily the cost of an employee’s yearly salary – if they continue to cover these medical expenses.

As for the nitty-gritty of the penalty, it only applies to small businesses that have more than one employee participating in a health insurance payment plan covered by the employer. This could be an individual or family policy that the employer helps finance directly – or one for which it reimburses the employee. Employers may exclude workers with less than 3 years of time at the company, those who are only part-time or seasonal, and those under the age of 25. The $100 a day fine applies for all other employees covered by the payment arrangement. S Corporations are currently exempt from the penalty, but only through the end of 2015.

The penalty is at play for both before-tax and after-tax reimbursement contributions for individual employee and family healthcare coverage.

“It’s the biggest penalty no one is talking about,” said Kevin Kuhlman, policy director at the National Association of Independent Business, in a statement. “The penalty for compensating employees for healthcare-related expenses is enough to destroy most small businesses.”

This newly implemented IRS penalty works out to over 18 times what the Affordable Care Act penalty is on employers. That penalty is $2,000 per employee per year on employers who do not provide a qualifying healthcare plan to their employees. In addition, employers with under 50 staff members are not exempt from this new $100-per-day penalty, but they are exempt from the $2,000 employer mandate fine.

The new rule, which only goes away if an employer stops providing health insurance money, was developed by IRS regulation writers within the Obama administration. It is completely separate from any Affordable Care Act regulations. It takes a major hit to small businesses for providing their workers with the only healthcare coverage that many business owners can afford in order to provide workers and their families with adequate medical care, whether they directly pay these costs for them or help defray the expenses through reimbursement checks.

“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,” Kuhlman added in the statement. “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.”

There is some good news, though. Rep. Charles Boustany in the House of Representatives and Sen. Charles Grassley in the Senate have each introduced bills to change the new rule. Both bills are awaiting action from Congress.

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To ensure you’re following all IRS rules that apply to small businesses, turn to the accountants, CPAs, and enrolled agents at 1-800Accountant. Call 1-800-222-6868 or visit www.1-800Accountant.

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