IRS Decides not to Put Small Businesses out of Business (at least through June 30, 2015) for Certain Health Insurance Violations

Remember when Pres. Obama said that if you liked your health insurance plan you can keep it?  Even though small businesses are not subject to the employer mandate, many provide health insurance benefits for their employees.  Many small employers have historically permitted their employees to choose their own individual health insurance policies, and then either directly paid the premium or reimbursed all or part of the monthly premium to their employees.  Small businesses that continued this practice into 2014 are in trouble.  This arrangement has been permitted for decades under the income tax law.  Now comes the Affordable Care Act (ACA) mandating certain marketplace health insurance reforms.  Beginning in 2014, it is against the law for employers to continue these premium payment plans for their employees.  The violation subjects the small employer to a $100 per day per employee penalty!  That’s right.  A small employer is exposed to a $36,500 annual penalty for each employee whom they assisted in purchasing an individual health insurance policy.  Somehow small businesses were supposed to know that these “employer payment plans” violated the law on January 1, 2014.  January and early February 2015 have been a time of high anxiety for small businesses and their accountants who have been trying to figure out how to correct the problem without financially ruining the business, and without causing the employees to pay income taxes on tax-free benefits!  Now the government has come to rescue us from their own rules by issuing IRS Notice 2015-17.

The Notice provides for a “transition” period through June 30, 2015, by which time small employers must cease providing financial assistance for their employees' purchase of individual health policies.  Instead, the employer must either offer a group health insurance plan, or use the SHOP Marketplace (known as Avenue H in Utah) to permit employees to select plans that are grouped together as an overall qualifying group plan.  Alternatively, the small employer can just raise their employees’ wages (with no mandate to spend the wage increase on health insurance) and get out of the business of helping employees pay health insurance premiums.  But this approach is very tax inefficient.  An employer’s payment of group health insurance premiums can be made income tax free to the employees, but a wage increase is fully taxable.  The Notice also provides special rules for employees of S corporations who own more than 2% of the employer’s stock.

The Notice provides that the $100 a day penalty will not apply for 2014 or through June 30, 2015, but it will begin to apply on July 1, 2015.  Again, this issue deals with small employers (those with less than 50 full-time equivalent employees) who are not subject to the employer mandate but who nevertheless choose to assist employees in obtaining individual health insurance.  These employers must help their employees in the way the government says to do it or else they risk being penalized out of business!