An IRS Health Care Fine That’s 12 Times Bigger than the Employer Mandate Penalty

Jul 28, 2015 - 6:30pm

Senior Editor, Digital Content

As if it wasn’t tough enough to run a business, the IRS will start punishing employers to the tune of $100/per day/per employee-- $36,500 annually--for helping to cover their employees’ health care costs, writes the Manhattan Institute’s Diana Furchtgott-Roth:

Beginning this month, the IRS can levy fines amounting to $100 per worker per day or $36,500 per worker per year, with a maximum of $500,000 per firm.

This Internal Revenue Service penalty is not written into the Obamacare law. The amount is over 12 times the statutory amount in the Affordable Care Act of $3,000 per worker per year. That is what an employer is charged when one of its employees gets subsidized care on one of the health-care exchanges. It’s 18 times the $2,000 penalty for not offering adequate health insurance.

The $100 fine is applicable not only to large firms, but also those with fewer than 50 workers that are exempt from the $2,000 and $3,000 employer penalties. Firms with one worker are exempt. The penalty for S-corporations will take effect on Jan. 1, 2016. The new rule is broad, sweeping and overly punitive.

Prior to the IRS’ pronouncement, many businesses who didn’t offer health insurance provided tax-free dollars to help their employees pay for individual health policies or other medical costs. Now, they will be penalized for aiding their workers.

The $100/per day/per employee fine is a cruel result of law already on the books cross-referenced with the ACA. As Furchtgott-Roth points out, nowhere in the Affordable Care Act’s 2,000 pages of text will you find this penalty. It “was already embedded in IRS code long before the ACA was passed, and the administration incorporated the tax regulation into ACA compliance guidelines,” Brittany La Couture of the American Action Forum writes

Furchtgott-Roth explains the IRS’ reasoning:

If the employer reimburses an employee for health-insurance premiums, this arrangement is described as an employer-payment plan. The employer-payment plan is considered by the IRS to be a group health plan that has to meet the conditions of Affordable Care Act insurance, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.

From this come perverse incentives:

It discourages people from finding and purchasing the insurance that suits them. It also discourages companies from hiring. Consider that 14% of businesses that do not offer group health insurance have some sort of arrangement to reimburse their employees for insurance costs, according to the National Federation of Independent Business.

Look at businesses with fewer than 50 employees. The ACA’s employer mandate doesn’t apply to them. They’re not required to offer health coverage, but many reimburse some health care costs to attract quality workers, or because they think it’s the right thing to do. Yet the IRS is penalizing them. Businesses and their employees should have more options for meeting their health care needs, but the IRS is essentially telling them they're better off not helping.

There are bills in Congress to fix this problem. Rep. Charles Boustany’s (R-La.) bill in the House and Sen. Charles Grassley’s (R-Iowa) bill in the Senate would allow small businesses (those with 50 or fewer workers) to again use tax-preferred accounts to help pay for employees’ health coverage or other medical expenses. The U.S. Chamber supports both bills. It would be an “important first step in restoring flexibility to all businesses and their employees,” wrote Bruce Josten, the U.S. Chamber’s Executive Vice President for Government Affairs.

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About the Author

About the Author

Sean Hackbarth
Senior Editor, Digital Content

Sean writes about public policies affecting businesses including energy, health care, and regulations. When not battling those making it harder for free enterprise to succeed, he raves about all things Wisconsin (his home state) and religiously follows the Green Bay Packers.