New IRS Rule Significantly Changes How Small Businesses Offer Health Insurance

July 2, 2015

Category: Compliance

For many years, small businesses that didn’t offer group health insurance would often help employees with health care by reimbursing or subsidizing individual plan premiums. These payments were considered non-taxable benefits.

  • As of July 1, however, no business—including small businesses under 50 employees—may directly reimburse employees for medical costs or individual insurance plan premiums
  • Companies that continue to do so now face the penalty of paying $100/day per employee in fines, which adds up to a total of $36,500/year per employee or a maximum of $500,000/year per company.


In 2013, the IRS issued Notice 2013-54, outlining how the ACA applied to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including those where employers reimburse employees for individual health insurance policy premiums. In short, plans where employers reimburse employees for individual plan premiums are now considered group health plans and must follow ACA guidelines.

Unlike the ACA itself, which only applies to companies with 50+ full-time equivalent employees, this new regulation applies to all companies regardless of size, meaning many ACA-exempt smaller businesses may be placing themselves at risk for significant penalties.

Am I affected?

You must pay fines if your company:

  • Has under 50 employees
  • Reimburses 2+ employees for individual health insurance policies and costs in place of group health insurance

An employer grossing up an employee’s pay to assist with paying for individual coverage is still allowed as long as the employer does not require that the amount be used to pay for insurance. Employers who offer an opt-out benefit on a post-tax basis cannot tell the employees how that benefit money must be spent, according to IRS Notice 2015-17.

For example: Company A has seven employees and reimburses each employee for the cost of his or her individual health insurance premium. Beginning July 1, 2015, continuing this policy exposes Company A to a $255,500 annual excise tax ($36,500 tax for each of the seven full-time employees), regardless of whether the reimbursement to the employees is with pre-tax or after-tax dollars.

An important legal note: employers also cannot ask or persuade employees to not enroll in a group plan. For example, requesting that employees enroll in Medicare or Medicaid and reimbursing premiums instead of offering insurance plans still puts businesses at risk, and these laws all still apply.

How do I avoid penalties?

If you want to help pay for health insurance for your employees, the only way to do so risk-free is by offering a group health insurance plan.

For many small businesses, finding affordable plans with a traditional insurance broker can be a costly and time-consuming process. If you’re looking for a convenient but compliant solution, Zenefits can help you give your team affordable group health insurance plans, automate your ongoing benefits administration and generate compliance paperwork, all for free. Click here to get health insurance quotes and chat with a Zenefits Benefits Advisor today.

Not ready for a solution, but still want to learn more about the ACA? Our ACA Pocket Guide can help.


Sarah enjoys analyzing the future of work, deciphering labor trends and where work meets tech. She tweets about all things work @shsiwak.

Category: Compliance

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