Reimbursing Employees for Healthcare? You Could Be Fined!

Recently, a rather obscure and not so well known IRS rule went into effect out that could have devastating consequences for many small business owners. The new legislation is directed at employers who are helping their employees offset the cost of health insurance with so called health insurance reimbursement accounts or HRAs.

For many employers, reimbursing employees for healthcare-related expenses is an easy way to help their employees without establishing an official group policy. The truth is that these HRAs have traditionally been a valuable tool used by business owners to provide health insurance to their staff without taking on the administrative cost and burden of establishing their own policy. It’s a tried and true practice that has worked for some 50 years.

But all of that is about to change.

The primary purpose of the Affordable Care Act has been the complete reform of the country’s health insurance market, with the goal being to make affordable health care coverage doable for every American. In order for this lofty goal to come about, however, drastic changes need to be made to the way employers compensate their employees and provide heath care benefits to them.

The new HRA penalty directly targets employers who are found to be assisting employees with the cost of health care through supplemental income, and those fines are pretty hefty. These businesses can be fined $100 a day per employee totaling up to $36,500 over the course of the year, or up to $500,000 per year for multiple employees. Ouch! Though this legislation actually went into effect starting January 1, 2014, the Treasury Department had delayed enforcement of penalties of this new rule- that is, until July of this year. That delay expired last week, meaning that businesses can now be charged for failure to comply.

Since drastic changes need to be made to the way small businesses compensate their employees, and since HRAs are pretty widespread among the nation’s smallest businesses, the penalty for offering an HRA is actually more expensive then avoiding healthcare coverage altogether. Under the Affordable Care Act, employers are required to offer coverage, but if they fail to comply with the employer mandate they can only be fined up to $2,000 per year.

While there has been some efforts among law makers to repeal the new legislation, as of yet the penalty is in full effect (retroactive to January 1, 2014). Small business owners really need to keep paying attention to this under-reported IRS rule or consult with a qualified professional to make sure that they are in compliance.