Small businesses across the United States face being hit with crippling penalties for helping their workers pay for health insurance.

An Internal Revenue Service (IRS) rule took effect July 1 that mandates fines for small businesses that give more than one employee additional pay to purchase health insurance or direct medical expenses, instead of buying a group health plan for all employees. Small businesses often go this route because they have too few employees to justify purchasing a group plan.

Companies providing reimbursement can be fined $100 per day, per employee under the rule, which is not part of the Affordable Care Act. The penalty can be $36,500 per employee, and up to a total of $500,000, per year.

“In contrast, the penalty on businesses for failing to comply with the employer mandate is only $2,000 per year,” Michael Cohn wrote for Accounting Today.

“It’s the biggest penalty that no one is talking about,” National Federation of Independent Business policy director Kevin Kuhlman said in a statement. “The penalty for compensating employees for healthcare-related expenses is enough to destroy most small businesses.”

Another group, the National Association for the Self-Employed, has asked the Department of the Treasury, which oversees the IRS, to delay the rule until the end of the year so Congress can pass legislation to remedy the situation. Bipartisan legislation was introduced late last month in both houses of Congress that would repeal the law.

-Noel Brinkerhoff

To Learn More:

New Tax Penalty Starts Today on Small Business Health Insurance (by Michael Cohn, Accounting Today)

Healthcare Reimbursement Penalty (NFIB)

New Small Business Health Insurance Program Put on Hold (by Matt Bewig, AllGov)