Heavy Fines for Employee Healthcare Reimbursements

The passage and implementation of the Affordable Care Act of 2010 (aka Obamacare) has been one of the most controversial pieces of legislation in modern history. To date, it has survived several lawsuits; including a challenge to the constitutionality of individual mandates and a claim that the law does not allow for tax subsidies in the states in which federal health care exchanges are set up. Affordable Care Act

On the business side, there is also a mandate to provide employee healthcare or face an annual fine of $2,000 per full time worker. Since full time is defined as working an average of 30 hours or more per week, the new normal with many businesses is employees that are scheduled to work 29.5 hours. As of July 1, 2015, a new IRS regulation went into effect assessing large penalties for businesses that subsidize or directly reimburse the costs of health insurance for their employees.

The new IRS provision is not written into the ACA. However, the law gave agencies such as the IRS and Department of Health and Human Services (HHS) broad authority to implement new regulations in keeping with the intent of the Act. Under the new provision, small businesses that reimburse the cost of employee premiums or employee health insurance policies can be fined $100 per day, up to $36,500 per year for each employee.

The penalty is applicable whether the contributions are before-tax or after-tax and unlike the employer mandate penalty, firms with fewer than 50 workers are not exempt. In fact, employers with more than one employee are affected by this provision. So who is exempt from this new regulation? Employers can only exclude part-time/seasonal workers, employees with less than three years of service, or employees age 25 and under. In addition, S Corporations are not impacted by this provision until January 1, 2016.

The practical effect of this new IRS provision is to end the practice of reimbursing employee health coverage without having to set up a company group health plan. Companies that do not have the resources to implement a group plan will likely opt for paying the $2,000 per employee annual fine and let the employee shop for health insurance on the federal exchange. Lawmakers are discussing legislation to address this issue, but at this point, the chances of passage are unclear.

If your business has two or more employees and you currently subsidize or reimburse health insurance for employees that do not qualify for the aforementioned exemptions, this new IRS provision affects you. To find out your options and ensure you avoid these costly penalties, speak with a local tax professional.

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