It Doesn't Always Pay To Be Generous: The New IRS Fine That Could Destroy Your Business

Did you know the IRS could penalize your small business if you help your workers pay for their health insurance by reimbursing them for their personal medical policies?

File this under the “sad but true” category for small business owners — at least for now. A new IRS rule that took effect July 1, 2015, can get you in trouble if you don’t provide group health insurance, yet you do offer some kind of monetary benefit instead to help your employees buy their own insurance policies or pay their medical bills.

Employers who are guilty of violating this new IRS rule, known as Notice 2015-17, can be fined $100 per day per employee. That adds up to as much as $36,500 a year per employee, or as much as $500,000 total. The added irony is, this potential fine far exceeds the mere $2,000 per year employers face under the Affordable Care Act if they fail to provide any health insurance at all.

This new rule affects even businesses with less than 50 employees. If you have more than one employee, you’re subject to this regulation. And it doesn’t matter whether you’re offering the reimbursement or compensation to your employees pre-tax or after-tax. Even S corporations are exempt only through the end of 2015, after which they’ll also be subject to the fines if they are in violation of the ruling.

This new IRS rule has managed to fly under the radar, and many businesses don’t even know it has gone into effect. According to Kevin Kuhlman, the policy director for the National Federation of Independent Business (NFIB), “It’s the biggest penalty that no one is talking about. The penalty for compensating employees for healthcare-related expenses is enough to destroy most small businesses.”

In other words, if you’re a business owner, it pays to be stingy under the new IRS rule instead of generous — something that goes against the grain of many small businessmen and women. Historically, small businesses have often opted to compensate their employees for buying individual health insurance policies to provide a benefit that is otherwise hard for the business to provide. Many independent businesses are so small they don’t employ a human resources person, and it is cheaper to give employees financial perks to cover medical bills than to invest in providing a group policy.

In effect, this generosity embraces the spirit of the Affordable Care Act — but not the letter of the law. And that’s where small companies can get in trouble and end up paying fines so high it puts them out of business.

Small business advocates like Kuhlman are committed to fighting this new IRS rule, especially when the spirit of offering assistance to help workers with their medical insurance and bills is part of what drives the Affordable Care Act.

“There’s no real justification for penalizing small businesses that do what the law’s strongest supporters claim to want, help employees obtain coverage or pay medical bills,” said Kuhlman in a June 29 interview appearing on NFIB’s website. “This is a rigid and thoughtless bureaucratic rule that undermines the purpose of the law. It ought to be repealed immediately.”

There is currently legislation in both houses of Congress aiming to repeal the IRS rule — backed by Rep. Charles Boustany (R-Louisiana) in the House and Sen. Charles Grassley (R-Iowa) in the Senate. If passed, this IRS rule would be repealed, saving small business owners from being penalized for their generosity. If you’re affected by this rule or want your voice to be heard, write your representatives and let them know you support having it repealed.

Until then, make sure you know the law and are in compliance with it to avoid hefty fines.