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Inside Obamacare: ‘the biggest penalty no one is talking about’

By   /   July 1, 2015  /   News  /   No Comments

By Eric Boehm | Watchdog.org

Employers who reimburse their workers for health care costs will face massive tax penalties beginning Wednesday.

Prior to the passage of the Affordable Care Act, with its mandate that all Americans purchase insurance and requirement for businesses to offer employees insurance plans, many small companies provided coverage by directly reimbursing medical costs or for the cost of private insurance plans. Businesses do it because that’s a less complicated process than dealing with an official health insurance plan, but continuing to do so after July 1 could cost them hundreds of dollars in fines each day.

AP file photo

IF YOU LIKE YOUR INSURANCE…: Businesses that offer reimbursement for health care costs could face massive IRS penalties beginning on Wednesday. Business groups say many small businesses might be unaware of the risk.

Business groups are calling attention to what they say is an obscure part of Obamacare that could crush small businesses who are unaware of it.

“It’s the biggest penalty that no one is talking about,” said Kevin Kuhlman, policy director for the National Federation of Independent Businesses, on Tuesday.

The penalties will only affect businesses with less than 50 employees. Those with more than 50 employees are already required to offer a health insurance plan.

The new rule is the result of an Internal Revenue Service interpretation of part of the ACA. It seems intended to force employers to offer a group health insurance plan (or leave their employees to fend for themselves on the health insurance exchanges).

The IRS says those reimbursements — technically known as “employer payment plans” — are “considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.”

The end result?

Such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code,” according to the taxmen.

Business groups say the punishment doesn’t fit the crime.

Even though the total fine is capped at $500,000 per year, that’s still miles ahead of the $2,000 fine that could be waiting for larger companies (those with more than 50 employees) that fail to comply with the individual mandate part of the ACA.

The NFIB says 14 percent of their members do not provide health insurance plans, but instead offer reimbursement.

The owner of a Minnesota-based company with 17 employees told NFIB the new rules would require health benefits to go through the payroll process. That means it is subject to taxes, which reduces employees’ benefits and increases the business’ costs.

“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,” said Kuhlman.  “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.”

The prohibition on employer reimbursement was supposed to start last year, but the IRS postponed implementing it until July 1.

There has been bipartisan support in Congress for eliminating the harsh penalty on small businesses, but bills have not advanced.

“This would be devastating to small businesses and impose hardships on their employees,” said U.S. Sen. Chuck Grassley, R-Iowa, in January, referring to the potential $100-per-employee-per-day fine. “Congress has to fix this problem.

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Eric is the national regulatory reporter for Watchdog.org. He lives in St. Paul, Minnesota. His work has appeared in Reason Magazine, National Review Online, The Freeman Magazine, The Philadelphia Inquirer, The Washington Examiner and Fox News. He was once featured in a BuzzFeed list-icle. Follow him on Twitter @EricBoehm87.