The Affordable Care Act (ACA) has changed the health insurance landscape in the United States. For small businesses with fewer than 50 employees, special attention must be paid to employer reimbursements of healthcare in order to avoid substantial fines and penalties.
Before the ACA, many small businesses had their employees carry individual insurance policies. In lieu of a group policy, the small business could simply offer to pay the premiums using after-tax dollars. Other small businesses may have carried group insurance policies, though a number of group plans were cancelled in 2014 for not being ACA compliant.
A small business may see an advantage in continuing with the practice of reimbursing employee health insurance premiums. In fact, many small business employees may be eligible for subsidies on the ACA Marketplace, resulting in a lower contribution by the employer. While this sounds good, it is, unfortunately, too good to be true.
Under IRS Notice 2013-54, an employer who establishes a payment plan may not apply an after-tax amount to health coverage or employee compensation. Such a plan would be considered a group health plan under the ACA. A group plan which merely pays an employee share of the Marketplace premium would not be compliant with the ACA.
The penalty for failure to comply with the ACA in a group health plan is $100 per day per employee. Annually, the fines could be $36,500 per annum per employee. A small business with three employees where the business pays the employee share of the marketplace premium would be liable for $109,500 in penalties, not a small sum.
A small business could decide to increase employee compensation, rather than risk violating the ACA. Any salary or compensation would need to be reported on the W-2 form (or 1099 for contractors) and appropriate taxes would need to be paid and withheld. Businesses that have or plan to hire employees should contact our business and tax attorneys to discuss their options and make sure they are not in violation of the ACA.