New Tax Penalty Targets Health Reimbursement Accounts

reimbursing employees for health insurance

Recently, a new IRS rule was rolled out that could have staggering effects for many small business owners.

The rule — basically a penalty — is aimed at employers who are helping their employees offset the cost of health insurance with small incentives, additional compensation or reimbursing employees for health insurance.

While it comes with hefty fines, the new tax rule is rather obscure and will likely be overlooked by some small business owners.

Heavy Fines for Additional Pay

For many employers, reimbursing employees for health insurance is an easy way to help their employees without establishing an official group policy. This can be particularly helpful if the small business is relatively new or doesn’t have an HR department.

It isn’t as if health reimbursement accounts are new. These have traditionally been a valuable tool used by business owners to provide health insurance to their staff without taking on the administrative cost and burden of establishing their own policy.

According to research, 14 percent of small business owners use this technique to provide coverage to their employees without having a company insurance offering.

Many, however, are unaware of this new penalty that directly targets that behavior.

Employers who are found to be assisting employees with the cost of health care through supplemental income can be fined $100 a day per employee, up to $500,000 per year. The implementation on July 1 only occurred after the Treasury Dept. delayed enforcement of penalties of this new rule.

That delay expired on Wednesday, however, and businesses can now be charged for failure to comply.

New Penalty Higher than Other Fines 

This number is actually quite shocking, considering the difference between this fine and the one imposed on employers who fail to offer group insurance altogether.

Under the Affordable Care Act, employers are required to offer coverage, but if they fail to comply with the employer mandate they can only be fined up to $2,000 per year.

The stark difference between these penalties and the widespread use of HRAs has caused many to push for new legislation to overrule the new IRS policy.

If Congress repeals the IRS ruling, this problem could be solved. But in the meantime, small business owners offering to offset the cost of health insurance for their employees may face high fines.

While this rule may not be long in effect, small business owners would be wise to keep their eye on this under-reported IRS rule, or consult with a trusted tax professional.

If the policy isn’t repealed, these business owners could face staggering fines with the very real potential to cripple their company.

Expand your knowledge with these five things you may not know about small business taxes, and payroll filings that will keep you compliant.

Health Insurance Form Photo via Shutterstock


Megan Totka Megan Totka is the Chief Editor for Chamber of Commerce. Chamber specializes in helping SMB's grow their business on the Web while facilitating the connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide. Megan specializes in reporting the latest business news, helpful tips and reliable resources and provides advice through her column on the Chamber blog.

10 Reactions
  1. Oh so it is that important? Or they are just looking for more ways to extract more money? Aren’t small business owners already having a hard time?

    • I agree, Aira, it’s always a bit frustrating when limiting laws are imposed on small businesses. I recommend talking to your accountant to ensure that you’re compliant and safe from potential penalties.

  2. Small Business Owners are always facing additional challenges, providing healthcare for their employers, whether p/t or f/t is just another concern. As if keeping their doors open wasn’t enough. Thanks for the article Megan. Great Read!

    • I echo your sentiment, Carl… as if we need one more potential penalty to worry about, on top of all the day-to-day operational details! Thanks for reading.

  3. Is this true? Why isn’t the IRS rule number referenced in the articcle?

  4. The IRS needs to die. It is nothing but organized crime, sucking at the soul of the nation.

  5. Great article. Would you kindly provide the IRS rule number? I’d like to learn to which small businesses this rule applies. Thank you