Small businesses that reimburse employees for the cost of premiums for individual health insurance policies or pay their health costs directly will be fined up to $36,500 a year per employee under a new Internal Revenue Service regulation that takes effect July 1, 2015 (article originally published June 30, 2015).

According to the notice, an employer arrangement that reimburses or pays for employee individual health premiums is considered to be a group health plan that is subject to the $100 per-employee per-day penalty. The penalty applies whether the reimbursement is considered a before-tax or after-tax contribution.

“It’s the biggest penalty no one is talking about,” said Kevin Kuhlman, policy director for the National Association of Independent Business. “The penalty for compensating employees for healthcare-related expenses is enough to destroy most small businesses.” You can read more in this NFIB post, “No Kidding: This Week IRS starts Punishing Businesses for Helping Workers Buy Insurance.”

The new IRS penalty is more than 18 times greater than the $2,000 employer-mandate penalty under ObamaCare for not providing qualifying health insurance for employees. And employers with fewer than 50 workers are not exempt, as they are from the employer-mandate penalty.

The rule appears nowhere in the Affordable Care Act but was developed by the Obama administration’s regulation writers at the IRS. The rule punishes small businesses for providing the only health insurance support many can afford – a contribution to help employees pay premiums for their individual or family health insurance policies or to help finance direct payment for medical services.

“Reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headaches of setting up a costly group plan,” Kuhlman said. “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.”

No more, says the IRS. If you take the “simpler, easier” route that you can afford, the IRS will slap you with $100-a-day, per-employee fines until you stop.

Rep. Charles Boustany has introduced legislation in the House (H.R. 2911) and Sen. Charles Grassley, in the Senate (S.1697) to remedy the problem. Both bills await congressional action.

“If there’s an opportunity for a bipartisan improvement toward affordable healthcare, this has to be it,” said Kuhlman. “There’s no real justification for penalizing small businesses that do what the law’s strongest supporters claim to want, which is to help employees obtain coverage or pay medical bills. This is a rigid and thoughtless bureaucratic rule that undermines the purpose of the law, and it ought to be repealed immediately.”

The rule covers employers with more than one employee participating in an employer health care/coverage payment arrangement. Employers can exclude workers who 1) have fewer than three years of service to the company; 2) are under age 25; and 3) are part-time or seasonal employees. The $100 a day fine applies for all other employees covered by the payment arrangement. S Corporations are exempt through the end of 2015.

This Market Watch article by Bill Bischoff provides many more details about this outrageous IRS rule that shows the intrusiveness and heavy-handedness of bureaucrats implementing Obamacare.

The above was originally published at on June 30, 2015.

Grace-Marie Turner is president of the Galen Institute (, a non-profit research organization focusing on market-based health policy solutions.

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3 replies
  1. Ralph Howarth
    Ralph Howarth says:

    This sounds as if the CMS ruling to extend subsidies to non-exchange plans could run counter to this IRS ruling and be what I call regulatory “collision”.

    And I notice this IRS ruling is not on the “List of 51 Changes to Obamacare…So Far” as this ruling to penalize small business reimbursement of employee personal health insurance was not even contemplated in ACA. King V. Burwell at least had some basis on the meaning of the ACA law on when subsidies are issued for state run exchanges vs. federally run exchanges; but this IRS ruling does not even have an argument based on ACA, does it?

    On one hand, due to the favorable rulings the courts have given the federal government to be liberal in interpreting the ACA, this current IRS ruling takes on the color of being another ACA “change” but it is a change that happens to be occurring in a “Sargoso Sea” of changes to ACA so might make as an “honorable” mention.

  2. Ralph Howarth
    Ralph Howarth says:

    I am no insurance expert, but as someone who has supported SOHO, there is in the tax code a thing called “self insurance”. Self insurance is a legally recognized instrument where an employer sets up their own fund and effectively brokers their own insurance policy. When it comes to health care, employers can do the same thing. Some health care cost sharing policies are also recognized under ACA. It is amazing how the legality of something can be just a piece of paper. Of course the piece of paper is contractual in form; but insurance policies are contractual in nature anyway.

  3. Ralph Howarth
    Ralph Howarth says:

    It is notable that any sort of a flat tax scheme immediately defangs the bulk of federal overreach. Once the tax code no longer can be used as a cludgeon as a back door method of passing code without formal legal channels of law, then programs like ACA lose much backing and justification.


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