Everything You Need To Know About IRS Notice 2013-54

The IRS has recently released a new health care mandate, Notice 2013-54, that will affect many small business owners directly. If you have 50 employees or less, have chosen not to establish a health insurance plan for your employees and instead reimburse them for health care-related expenses via a Health Reimbursement Arrangement (HRA), you need to understand how this new IRS mandate could cost you as much as $36,500 per employee per year.

Up until September of 2013, many smaller companies encouraged their employees to choose their own health insurance on the open market. After verifying their policies and premium costs, these employers reimbursed workers for part or all of the costs via a mechanism known as an HRA. That all changed with the adoption of the Affordable Care Act (ACA).

That is because arrangements such as this are considered to be group health plans under the ACA and therefore do not comply with some of the ACA’s requirements. Specifically, the ACA stipulates that cost sharing is not allowed for certain preventive care coverage and prohibits annual limits for essential health benefits.

The penalties for failing to comply with IRS Notice 2013-54 are steep. For example, at $100 per employee per day, a business with 10 workers could be fined a whopping $365,000 in one year alone. That amount of money represents a crushing financial burden that could easily sink many small operations that are already running on only the narrowest of profit margins. The IRS also can charge penalties and interest, which could elevate the cost even higher. These penalties apply whether the arrangement is considered to be a before- tax or after-tax contribution.

Up until July 1, 2015, the IRS implemented a grace period for employers who had been assisting their workers with HRA’s, but that transition period has ended and companies are now subject to penalties. There is legislation being considered in the House and the Senate, but both bills have not yet been acted upon by their respective legislative bodies. In the upcoming months, advocates of these bills hope that these devastating penalties on small businesses that are simply trying to assist their workers with health insurance expenses can be reformed.