IRS Penalty Relief for Small Businesses Comes to an End

On June 30, 2015, the relief period for small companies (under 50 employees) reimbursing employees for individually purchased health insurance without penalty has come to an end. To recap, the IRS issued a $100 per-employee-per-day excise tax for companies that fail to comply with the market reforms for group plans under the Affordable Care Act (ACA). Companies with fewer than 50 employees had all of 2014 and up to June 30, 2015 to comply with the new laws and not worry about the excise tax.

Typically known as employer payment plans, the ACA requires that employers must provide the minimum coverage regardless of whether the reimbursements are treated as taxable income or tax-free. When a company reimburses an employee for their own individual health insurance plan, it generally does not comply with the ACA market reforms. To quote the Department of Labor, “An employer may not use an arrangement that provides cash reimbursement of an individual market policy on either a pretax or post-tax basis. Such an arrangement constitutes a group health plan that fails to comply with market reforms because the cash payment cannot be integrated with an individual market policy.”

The good news in all of this is that the IRS says that giving employees a raise in taxable wages to help pay for individual coverage is not an employer payment plan unless the extra pay is conditional on the employee’s buying coverage and/or endorses a particular policy or insurer.

Also of note, S corporation owners (2% or more) can continue to reimburse premiums without fear of the penalty until the IRS says differently.

Please contact our Small Business Accounting Services Department for more information.

(The IRS has implied that if the SHOP Marketplace for small companies is not working properly by June 30, 2015 it would extend the relief from the excise tax. As of the writing of this article the IRS has not extended the relief past June 30, 2015.)


Mary Kay Toth, CPA

Senior Manager

Mary Kay is a Senior Manager at Brown Schultz Sheridan & Fritz with more than 20 years of public accounting experience. Mary Kay consults with a wide variety of small business clients, assisting them with their financial and tax needs.