Obamacare is About to Bankrupt a Whole Bunch of Small Businesses

11//22/2014

The crushing costs of compliance with the regulatory burdens of Obamacare have already been well documented, especially as they pertain to small businesses. But as small businesses prepare their corporate tax returns next year, many accountants are warning that, based on Department of Labor guidelines issued after the election, countless small businesses are about to be hit with a huge tax penalty that they simply cannot afford.

The issue here is somewhat complex, and is exactly the sort of issue that most small business owners trust to professionals to handle for them. When these businesses were notified that the health plans they offered their employees were not compliant with Obamacare, many of them sought to avoid dumping their employees on the exchanges. At the time, insurance vendors, based on a colorable reading of the law, encouraged many small businesses to work with them to either provide so-called section 105 plans where the employer would reimburse a broker for the cost of coverage bought by the employees, or to encourage their employees to buy their health insurance directly from brokers and to reimburse them for the purchase of this healthcare coverage. All year long, the Department of Labor allowed this practice to continue, only to declare at the 11th hour that this arrangement would be treated as noncompliant with Obamacare and thus subject employers to a penalty. The reasons for this decision are obvious and disgustingly political: the Obama administration wants to boast of larger numbers of people enrolled in the exchanges for political reasons:

This answer is very clear that ANY reimbursement of health insurance payments by an employer for an employee is subject to the ACA rules and therefore are subject to possible penalties under Section 4980D of the Code.  These penalties can be substantial (up to $100 per day per employee).  Therefore, it is extremely important to make sure that any payment of premiums for employees is as a direct result of payments withheld from an employee’s paycheck and then directly transmitted to the health insurance provider.  Any gross of up wages directly related to payment of premiums may be problematic. 

Additionally based on this Q & A, it is probably better for the employer not to pay any health insurance premiums (unless a qualified group plan or for only one employee employers).  It appears that the DOL and the Administration is pushing all non-qualified premiums onto the exchange and those premiums are usually paid directly by the employee (and may not be reimbursed).  This will increase the number of persons covered by the exchange which is the primary goal of the administration (this last part is strictly my opinion).

If you can do basic math, you can probably figure out that many small businesses are about to get hit with a penalty of $36,500 per employee through no fault of their own. If you have any familiarity with small businesses, you know that the overwhelming majority of them are simply not going to be able to pay an unforeseen penalty of $36,500 per employee and are going to be forced to simply shut their doors. As a result, who knows how many employees are about to have no health coverage at all or be forced onto the subsidies (provided that they aren’t eliminated in most states via King v. Burwell). It’s yet another example of the twisted incentive created by Obamacare where the government would actually prefer that taxpayers be on the hook for these people’s health insurance than their own employer, just because they oppose the specific payment mechanism for political reasons.

And the saddest thing of all is that many small businesses are going to get caught in the crossfire of this political fight and snuffed out. The monstrosity that is Obamacare must be repealed, and fast, no matter the political cost, or the damage it wreaks on our economy might well be permanent.

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