The market reform section of the Affordable Care Act (ACA) imposes a $100 penalty per day per employee on any employer, regardless of its size, that offers a group health plan that fails to comply with certain coverage requirements and restrictions. For example, a small business would be subject to this penalty if it reimburses an employee for his/her individual health care premiums. Although these types of reimbursements have become common practice in the small business community, you, as the business owner, could now face financial ruin if assessed with a potential $36,500 per employee penalty.
This new $100 per day penalty also impacts reimbursements to greater than 2% shareholders in S-corporations. Historically, health care reimbursements were allowed and were only included in wages, not subject to Medicare or Social Security tax. Because of ACA guidelines, these reimbursements may no longer be allowed, therefore subjecting them to the steep penalty.
In an effort to alleviate the strain on small employers, the IRS has issued transition relief. Small Employers (generally businesses with less than 50 full time and full-time equivalent employees in the prior year) will get penalty relief through June 30, 2015. Businesses taxed as S-corporations can continue to report reimbursements of health insurance for 2% shareholders until December 31, 2015 or until further information is provided.
As this deadline approaches, it’s important for the future of your business to ensure it is compliant with these new ACA guidelines. Don’t get caught continuing the practice of illegal reimbursements after the relief date! Simply treating the premiums as taxable compensation does not solve the problem and will not exclude you from the penalty. An option for small employers who are not subject to the mandate is to give their employees raises or bonuses as long as the increase isn’t tied to their health insurance premiums. For more information, please contact us.
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