What Small Businesses Need to Know About Health Insurance and Section 4980D of the Internal Revenue Code (Effective July 1, 2015)

If you are a small business (less than 50 full-time employees or full-time equivalents) and have tried to do the right thing by reimbursing employees for individual health insurance policies, paying a stipend or pay their health costs directly in lieu of providing health insurance, think again.

According to the Internal Revenue Service regulation, Section 4980D, these types of arrangements are considered employer payment plans which do not satisfy the market reforms under the Affordable Care Act (ACA). As a result, you could end up paying $100/day excise tax per applicable employee ($36,500 per employee, per year).

There has been some bipartisan support in Congress to eliminate this stiff penalty. Rep. Charles Boustany and Sen. Charles Grassley have both introduced bills to eliminate this penalty; however, neither bill has advanced as of yet.

So for now it seems the options for small business are to:

     1.  Offer group health insurance;

     2.  Steer employees to the health insurance exchanges; or

     3.  Continue to provide employer payment plans and face the excise tax.

See the links below for more information:

Forbes/Opinion Small Business Threatened With $36,500 IRS Fines For Helping Employees With Health Costs

SBA U.S. Small Business Administration/Employers with Up to 50 Employees

IRS/Employer Health Care Arrangements

IRS/Find out how ACA affects Employers with fewer than 50 Employees

Guidance on the Application of Code § 4980D to Certain Types of Health Coverage Reimbursement Arrangements