A recent press release from the National Federation of Independent Business (NFIB) noted that, "Under Obamacare, individuals face a penalty for not buying health insurance. But now, even small businesses that choose to jump through hoops to help workers pay for healthcare costs could pay penalties."

In the past, business owners who did not offer group health insurance were able to reimburse their employees tax-free for individual health insurance policies.

Recently, though, the IRS has begun prohibiting these reimbursement arrangements. In specific, a new IRS regulation that went into effect on July 1 could impose a fine of $100 a day per worker (up to $36,500 per employee per year), and up to a total of $500,000 per business, for businesses that provide tax-free assistance with workers' individual health insurance premiums or medical costs.

"The regulation would cost businesses over 18 times more than the Obamacare penalty for larger businesses not providing health insurance for employees, which is $2,000," said Kevin Kuhlman, director of legislative affairs for NFIB.

Why would the PPACA encourage the IRS to do this? Actually, the PPACA had and has nothing to do with it. In fact, the IRS rule actually appears nowhere in the PPACA. It is a separate IRS rule that was created independent of the PPACA and was set to take effect July 1 of this year. "It's hard the 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 businesses don't know it."

According to NFIB research, one in seven (14 percent) of small businesses not offering group health insurance has these policies in place. "They think they're doing a good thing, but they're walking into a minefield," said the press release. "With employers now no longer being able to provide these reimbursements, the new IRS regulation could mean cost increases for hundreds of thousands of workers."

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 "This is a rigid and thoughtless bureaucratic rule that undermines the purpose of the law, and it ought to be repealed immediately."

The penalty even kicks in for businesses with fewer than 50 employees who are exempt from being required to establish group plans under the PPACA, and who were told repeatedly that the PPACA would not affect their businesses. "Small businesses with too few resources to set up group healthcare plans could still face insurmountable fines for providing for their workers' well-being," said the press release.

"The penalty for compensating employees for healthcare-related expenses is enough to destroy most small businesses," said Kuhlman. "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. Most small employers don't have HR departments or benefits specialists, so this is a simpler, easier way to help their employees."

Fortunately for small business, legislation has been introduced into both houses of Congress (S.1697 and H.R.2911) to address this new, and potentially expensive, problem for small businesses.

Instant Insights /

New IRS rule penalizes small businesses for helping employees

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