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How Small Employers Could be Penalized by the Affordable Care Act

March 1, 2016

Author: Donna Nuernberg, Manager of Accounting and Consulting Services

An IRS Revenue Ruling went into effect on July 1, 2015 that could cost your company a penalty of $100 per day, per employee (up to $500,000). Under Internal Revenue Code § 4980D, the penalty could be $36,500 per year per employee for employers who do not offer insurance coverage but instead seek to reimburse their employees for insurance purchased on the individual market. If you’re not in compliance, this penalty could put you out of business.

Many small employers with less than 50 employees think that nothing in the Affordable Care Act (“ACA”) will impact them. However, this penalty can be assessed to employers with as few as two employees. Many small employers have used payment arrangements such as reimbursing the employee for premiums or making the payment directly to the insurance company to help employees obtain health coverage without the trouble and cost of providing a full-fledged company group health insurance plan. Some employers have done this because they could not obtain an affordable group policy or they may not have enough employees to meet the insurance companies’ criteria. According to the IRS, this penalty can be assessed to employers for simply offering plans which reimburse employees for premiums paid by them for individual health insurance policies. The penalty may also apply to direct employer payments of premiums for employees’ individual health policies (Jerry Love, 2016).

Unlike early reports stating the ACA would only affect larger companies, this penalty applies to any company that reimburses more than one employee.

This penalty is huge. It is more than 18 times greater than the $2,000 employer-mandate penalty under ACA for not providing qualifying health insurance for employees. It is very important to note employers with fewer than 50 workers are not exempt. The basic issue is how an employer may be paying for an employee’s health insurance. Many small employers will reimburse their employees for premiums on their individual health insurance policies or the employer may pay the premium directly on behalf of the employee. These arrangements have long been popular with small employers who want to offer health insurance but are unwilling or unable to purchase group health coverage (Jerry Love, 2016).

There are a few exceptions to this penalty, but caution should be taken.

Penalty Exception if Only One Employee

The penalty will not apply if only one employee is recompensed for individual health insurance and/or other medical expenses.

Shareholders of Sub S Corporation Exception

“IRS Notice 2015-17 also clarifies that S corporations may continue to report reimbursements of health insurance of 2% (or greater) shareholders pursuant to Notice 2008-1. Until further guidance is issued, and in any event through the end of 2015, the excise tax under Internal Revenue Code § 4980D will not be asserted for any failure to satisfy the market reforms by a 2% shareholder-employee healthcare arrangement (Jerry Love, 2016).”

Clearly, ACA was written with the intention of helping everyone in America obtain health insurance. Further, the ACA has a clear mandate to the larger employers (those with over 50 full time employees (“FTE”)) to provide affordable health insurance to all of their full time employees. According to the IRS and Department of Labor (“DOL”), these individual market policies cannot be integrated to meet the market reform provisions. Specifically, the IRS stated these plans violate the Essential Health Benefits provision of the ACA, as well as the prohibition on spending caps on these mandatory benefits.

There are options if you think you fall into the above situation:

  • If you are reimbursing employees or paying for their policies directly, you can require them to pay for the insurance themselves. This can be achieved by increasing their salary. This option requires the payment of both employee and employer portions of Medicare and Social Security tax.
  • Research setting up a group policy that covers the employees (Jerry Love, 2016).



Jerry Love, C. C. (2016, January 27). Will Your Clients Run Afoul of ACA’s Largest Penalty? Retrieved from CPA Tax Magazine:

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email

© 2016

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