Newly instituted rules1 could result in small employers being penalized for subsidizing employee medical costs. Obamacare exempts small employers- those with fewer than 50 full-time employees - from the requirement of establishing a group health plan. For employers that cannot afford to set up a group plan, there is a natural tendency to reimburse employees for some of the costs of buying individual insurance. Unfortunately, employers who do this could be subject to significant penalties.
The IRS treats "employer payment plans" (plans or arrangements to subsidize an employees' medical insurance costs) as group health plans that need to comply with the regulatory requirements for employer-provided health insurance. As a result, a plan to pay an employee's cost of medical insurance, directly or through reimbursement, in many cases will violate some of the rules and lead to the employer being liable for penalties.
The Service recently issued guidance as to whether an increase in compensation to assist with the cost of healthcare is considered to be an employer payment plan. Increased compensation is allowed if it is not conditioned on the purchase of health insurance. Employers who are currently paying or reimbursing such costs should consider increasing their employees' salaries instead.
The IRS previously provided penalty relief to small employers for employer payment plans. However, the relief ended on June 30, 2015. This means that small employers were potentially liable for penalties for non-complying plans since July 1, 2015. For S corporations, the IRS has extended the penalty relief through December 31, 2015 for reimbursements of individual health insurance coverage of 2% shareholders.
The penalty for failing to meet certain group health plan requirements is $100 per day of noncompliance per employee. The yearly rate for this penalty is $36,500 per employee. The minimum penalty is $2,500 per individual affected by a violation.
1 Guidance on the Application of Code Section 4980D to Certain Types of Health Coverage Reimbursement Arrangements. Notice 2015-17.
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