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ACA Irony

July 14, 2015

Beginning this month, small employers that reimburse their employees for their health- care costs could be subject to hefty IRS fines of $36,500 per year per employee, capped at $500,000. The sad irony is that, if these small businesses did nothing to help their employees pay for healthcare, they wouldn’t face any IRS penalty.

At issue are “employer payment plans” that had, ­until July 1, allowed employers to reimburse employees for healthcare expenses or premium costs using pre-tax dollars. According to the IRS, “such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.”

Under the law’s employer mandate, employers with 50 or more full-time employees or full-time equivalents are required to offer “qualified and affordable” health insurance coverage to their employees. While employers with fewer than 50 employees are not normally subject to this requirement, the IRS is interpreting the ACA in a way that makes these “employer payment plans” subject to the same rules as the large employer group health plans and, as a result, subject to the same rules as larger employers but with a much larger IRS penalty.

Simply put, under the ACA a small employer would be better off offering their employees no assistance whatsoever than to provide them assistance paid with pre-tax healthcare dollars. While the law caps the small employer’s fine at $500,000 per year, larger employers are facing a penalty of only $2,000 per year per employee if they fail to offer ACA-qualified coverage.

Commonly known as the employer mandate, large employers’ health plans must provide essential health benefits, covering a wide array of benefits including pediatric oral and vision care, substance abuse services, and preventive chronic disease management, and are subject to ACA rules on patient cost-sharing and free preventative care for certain services. The failure to meet these requirements can result in the IRS penalties.

For smaller firms, employer payment plans can provide an alternate way to provide health benefits to their employees. Many small businesses cannot afford to pay an outside firm to administer a health benefits plan while others want to help employees

pay for healthcare expenses in a manner that best meets their employees’ needs and preferences, rather than a one-size-fits-all plan. As a result of the ACA, these small employers will no longer be using pre-tax dollars for their employees’ health insurance and healthcare costs.

Rather than staying out of the way of these small employers who want to provide healthcare assistance to their employees, IRS penalties will now force these small employers to choose between paying employees more (with taxable dollars) or forgoing assistance altogether.

Even if some employers chose to give their employees an equivalent bump in pay, every dollar of that increase will be taxed. That means that $3,000 that formerly went to healthcare benefits would, for example, be worth only $2,000 after taxes. Many small employers would have a difficult time making up the diminished benefit, which in this case would require a bump closer to $4,500.

While the ACA remains a divisive policy issue, lawmakers on both sides of the aisle should be able to agree that the law should promote — not discourage — healthcare coverage. Of the many changes needed to the law, this would be a good place to start.

Naomi Lopez Bauman is the Goldwater Institute’s Healthcare Policy Director.



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