By now there’s a good chance you know that a business with fewer than 50 employees could not reimburse any of its employees for individually purchased health insurance without facing the $100-a-day penalty ($36,500 per employee per year).
You may have
- decided that’s a ridiculous rule and you’re not going to follow it.
- stopped reimbursing or paying for the individually purchased health insurance and simply added that amount to the employees’ W-2s.
If you did either of the above, you were breaking the law as it stood before December 13, 2016. Now you can thank the 21st Century Cures Act (Public Law No: 114-255) for reinstating IRS Notice 2015-17 that wipes away the $100-a-day penalty for small businesses—retroactively to years before 2017.
And if you were one of the many small business taxpayers who changed your systems to comply with the law and avoid the $100-a-day penalty, this forgiveness law likely outrages you (and properly so).
The combination of the new law and the original IRS notices means that the IRS will not enforce the $100-a-day penalty with regard to insurance payments if all of the following apply:
- You employ fewer than 50 full-time employees (or full-time-equivalent employees).
- The expense for the insurance and/or the reimbursement premium both occur before January 1, 2017.
Insurance Premiums Only
The penalty relief applies only to reimbursement of individually purchased insurance premiums.
The IRS notice specifically states that the penalty is still in effect for reimbursements of medical expenses other than insurance premiums if the reimbursements are otherwise in violation of the Affordable Care Act.
Act Fast on Payroll
If you reimbursed some or all of the insurance premiums for some or all of your employees in 2016 and simply added those amounts to their W-2, you may want to amend your payroll tax returns to benefit both your business and your employees.
The first reason to act fast is that it’s likely your employees have not yet filed their tax returns. Now you can reduce their taxable income by the amount of the insurance reimbursements. You are going to see big smiles on your employees’ faces.
If you have to amend your 2016 payroll returns to reduce your employees’ pay for the individually purchased health insurance, the IRS will issue a refund check for the overpayment of your employer payroll taxes.
Employees’ Insurance Premium Tax Credits
Reimbursement of health insurance premiums could cost your employees the opportunity to use or benefit from all or some of the premium tax credit if they purchase or purchased insurance through a health insurance exchange. The employees don’t lose any money. They just can’t double-dip.