Congress Eliminates Harsh Health Care Penalty Against Small Businesses


On Wednesday, December 7, 2016, Congress passed important legislation removing a tax penalty placed on employers who reimburse their employees for health insurance premiums. Passed by both the Senate and the House, this legislation is a huge victory for small businesses across the country that wish to provide reimbursement health coverage to their employees. Small business owners who do not sponsor a company-wide health insurance plan no longer need to fear large IRS penalties for providing their employees support with rising health care costs.

The IRS began enforcing this penalty in July 2015, placing it upon employers providing individual monthly health care reimbursements as an alternative to sponsoring company-wide plans. The penalty, applied against before-tax and after-tax contributions, is not a provision of the Affordable Care Act, but was written by regulation writers at the IRS.

Severe Penalty for Small Businesses

The penalty was especially harsh on small businesses. Employers who violated the rule were fined up to $100 per day for each employee, or up to $36,500 a year per employee, which is 18 times greater than the penalty imposed on larger employers that don’t offer insurance to workers. This has created difficult situations for startups attempting to attract top talent to propel their organization that cannot afford to provide a company-wide plan.

This new legislation protects small business owners from large IRS fines, allowing them the necessary flexibility to provide employees with some form of support for health care. Limitations surrounding health benefits are a reality for startups and small businesses—many owners want to provide their employees with benefits, but simply cannot afford to at their company size and/or stage. Reimbursements allow companies to provide a level of support employees need at a cost the business can sustain.

21st Century Cures Act

This protection, provided under Section 18001 of the 21st Century Cures Act, will permit business owners to compensate employees for the cost of individual insurance premiums or medical visits. The 21st Century Cures Act passed the Senate with a 94 to 5 vote, the House with a 392 to 26 voteand is expected to be signed quickly by President Obama.

In addition to eliminating this IRS Penalty, the bill will boost funding for medical research, with $1.8 billion reserved for Vice President Biden’s “cancer moonshot” and $1.6 billion reserved for brain disease research, including Alzheimer’s, as well as improve the development and approval process of experimental treatments and reform federal policy on mental health care.

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