MAJOR UPDATE AS OF DECEMBER 2016!  —  Please read new post here.

Small business groups are sounding a warning about an obscure Internal Revenue Service rule that takes effect Wednesday imposing heavy fines on small businesses for helping defray the cost of their workers insurance.

Health reimbursement accounts, or HRAs, are more simply known as the practice of reimbursing employees for the cost of insurance.  One problem: it’s illegal.  The reason behind it makes sense — an employee might have a personal tax situation whereby they can get Marketplace health insurance subsidized by the government, and it’s cheaper for the employer to simply reimburse the employee for that insurance than for the employer to provide an insurance plan.  However, that’s unfair to the rest of us, whose tax dollars go to paying for that subsidy.

Although that reasoning makes sense, in reality, most small business employers who provide this perk to employees do it because they avoid all the administrative costs and headaches involved with establishing and maintaining an insurance plan for their staff.

A huge issue is that a lot of these small business owners aren’t aware that the practice of reimbursing employees for health insurance now comes with extremely stiff penalties.

…employers who do not offer a group health plan, but give their workers additional pay to compensate for the purchase of health insurance or direct medical expenses, can be fined $100 per day, per employee. Over the course of a year that can add up to $36,500 per employee, up to $500,000 in total. In contrast, the penalty on businesses for failing to comply with the employer mandate is only $2,000 per year.

Please spread the word to your small business accounting clients or friends/colleagues who own businesses and have employees.  It is an extremely costly mistake to make, and according to this Accounting Today article, “14 percent of small businesses that do not offer group insurance reimburse their workers instead, unaware of the potential pitfalls of the regulation.”

Source: New Tax Penalty Starts Today on Small Business Health Insurance | Accounting Today News