Small employers who are not required by the Affordable Care Act (ACA) to provide health coverage to their employees nonetheless seek to do so for important reasons: they want their staff to be healthy, they need to be competitive with larger firms when it comes to talent.
For years, one of the ways small business owners have been able to do this is to reimburse employees for their personal health insurance premiums. Under ACA, many of these employees can now obtain subsidized coverage by purchasing a policy through a government exchange and claiming the premium tax credit. Reimbursement arrangements may no longer be possible.
The IRS said that a reimbursement arrangement is a health plan that doesn’t meet ACA requirements. As such, it results in a $100 per-employee, per-day penalty if the employer reimburses more than one employee. Last February, the IRS provided temporary relief, saying it would not impose the penalty for reimbursements prior to July 1, 2015. That deadline has now arrived, and employers that continue reimbursement arrangements potentially face penalties. NFIB estimates that 14% of small employers are in this category.
What to do?
Employers are not barred from increasing workers’ paychecks so they can afford to buy health coverage on their own. The only warning: employers cannot require employees to use raises to pay for health coverage. Care must be used when small employers exempt from the employer mandate under ACA drop coverage and increase pay to avoid the link that could trigger the penalty. (NFIB reports that 6% of small businesses dropped coverage in 2013 and 2014.)
The Small Business Healthcare Relief Act (H.R. 2911 and S. 1697) would effectively allow small businesses to make reimbursements. More specifically, the bill would permit small businesses to use pre-tax dollars to assist employees in the purchase of health insurance through the individual market.
Tread carefully in your business practices when it comes to health coverage because good intentions may trigger severe tax penalties. And support legislation that’s favorable to small businesses.