IRS controversy

Sen. Charles Grassley, left, and Rep. Lou Barletta.

WASHINGTON – Catina Tindall, an insurance broker in the Georgia coastal city of Brunswick, tells of a client who used to help pay for medical costs of his 12 employees. Until the IRS and Obamacare got in the way.

Her client, a doctor, doesn’t offer health insurance to his small staff. 

Instead, until last year, he put $200 each month into an account for each employee to help pay deductibles and other medical expenses.

But the IRS effectively barred what are known as health reimbursement arrangements under a rule tied to the Affordable Care Act. Continuing the payments, it warned, would trigger fines of $100 per day.

Small business groups say the decision makes little sense and penalizes those who only want to help their workers.

“If the small employers are willing to help their employees – even if in a small way – would we not benefit by allowing them to do so?” said Tindall, president of First Coast Benefits Solutions.

With businesses filing tax returns for the first time since the IRS said it would start enforcing the rule, last July 1, some employers may find good intentions rewarded with fines and audits, said Kevin Kuhlman, manager of federal government affairs for the National Federation for Independent Business.

About 16 percent of the group’s members are unaware of the rule and still making health reimbursements, he said.

That’s raising concerns in Congress.

“Nobody wants to go through tax season in fear of the IRS. The Obama administration needs to work with Congress to fix something that never made sense in the first place,” said Sen. Charles Grassley, R-Iowa, in a statement.

Grassley is sponsoring a plan to undo the rule. But in an election year, when Congress will recess for most of the summer for campaigning, lobbyists and others are unsure if lawmakers will take up the issue.

The rule arose after the 2010 Affordable Care Act set minimum standards for group health insurance. It prohibited annual limits on benefits and required that some forms of preventive care be provided without cost sharing.

Businesses with fewer than 50 people are not required to offer health insurance.

IRS officials did not return a request for comment. But the agency’s concern was that small businesses could drop insurance benefits because employees could buy insurance through the Affordable Care Act’s new health care exchanges, said Edwin Park, vice president for health policy for the left-leaning Center on Budget and Policy Priorities.

Instead of offering coverage, the IRS expected, businesses could set up less-costly reimbursement arrangements. If fewer employers offer coverage, he said, older workers and those with greater medical costs would go to the exchanges, increasing costs for all of those who buy insurance individually.

In practice, the IRS rule hurts businesses and employees, according to those who used the health reimbursements.

Warren Hudak, president of Hudak and Co., an accounting firm in New Cumberland, Cumberland County, said his company cannot afford insurance for its seven employees. Offering the benefit of health reimbursement accounts allowed him to compete for workers in the Harrisburg area.

When the new rules came out, Hudak said he started giving employees monthly bonuses instead. But unlike the health reimbursements, bonuses are taxed, so Hudak needed to pay more.

He also increased bonus payments as premiums have risen. He now gives between $400 and $500 for individual coverage and $800 to $1,200 for family coverage.

But that means he cannot hire more employees or expand the business, he said.

Rep. Lou Barletta, R-Hazleton, whose district includes New Cumberland, is co-sponsoring a House version of Grassley’s bill.

“Because of yet another ridiculous flaw in President Obama’s health care law, the IRS has made it practically impossible for them to help their employees like this without penalties that would drive them out of business,” Barletta said in a statement.

Rep. Buddy Carter, R-Ga., who represents Brunswick and is also a co-sponsor, called the rule “just another example of outrageous actions from the IRS.”

Tindall said another client, the owner of a hardware store, had to stop paying up to $300 per month in health reimbursements to help workers afford individual coverage.

Without the payments, many workers couldn’t afford coverage at all and instead opted to pay a federal fine for not being insured.

Tindall said her other client, the doctor, considered giving every member of his staff a 5 percent raise when he stopped paying the reimbursements.

That caused controversy and hard feelings.

The doctor realized that if he gave raises, he would have to give one to everybody. But employees covered by their spouses’ health plans would get extra money without having to spend it on health care.

Some members of his staff complained. The doctor decided he couldn’t do anything to keep his employees from losing money.

Ultimately, said Tindall, two of his employees quit.

Kery Murakami is the Washington, D.C. reporter for CNHI’s newspapers and websites. Reach him at

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