Small Businesses Face Obscure Obamacare Penalty

Published July 3, 2015

Businesses that reimburse their employees for health care costs may face large Internal Revenue Service (IRS) penalties even though they may be unaware of the risks.

Before Obamacare — with its mandate that all Americans purchase insurance and requirement for businesses to offer employees insurance plans — was passed, many small companies provided coverage by directly reimbursing medical costs or for the cost of private insurance plans. They do this because it’s less complicated than dealing with an official health insurance plan, however, after July 1, they may be fined hundreds of dollars each day.

This is an obscure part of Obamacare that could crush small businesses that are unaware of it, say business groups. quoted Kevin Kuhlman, policy director for the National Federation of Independent Businesses, saying, “It’s the biggest penalty that no one is talking about. The penalty for compensating employees for health care-related expenses is enough to destroy most small businesses. It’s hard to believe Congress or the President intended to punish employers much more severely for actually helping their workers, nevertheless, that’s the consequence and most small businesses don’t know it.”

Kuhlman says that reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headache 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.

“If there’s an opportunity for a bipartisan improvement toward affordable healthcare, this has to be it,” said Kuhlman.  “There’s 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.  This is a rigid and thoughtless bureaucratic rule that undermines the purpose of the law, and it ought to be repealed immediately.”

The penalties only affect businesses with fewer than 50 employees because those with more than 50 employees are already required to offer a health insurance plan. The rule is based on an IRS interpretation of part of Obamacare that seems intended to force employers to offer a group health insurance plan or dump their employees onto the health insurance exchanges.

The prohibition against employer reimbursements should have started last year but the IRS postponed implementing it until July 1.

There has been bipartisan support in Congress for eliminating the penalty on small businesses, but bills have failed to gain any traction.

U.S. Sen. Chuck Grassley (R-Iowa) wrote on his website in January, “I’ll keep looking for opportunities to fix this problem. Small businesses shouldn’t face steep penalties just for trying to help their employees. This is the kind of problem Obamacare created because it was poorly thought out.” 

Kenneth Artz ([email protected]) is managing editor of Health Care News.