IRS could issue penalties for employers who reduce staff

The Affordable Care Act was broad-sweeping legislation that impacted more than just individuals' insurance coverage. The ACA not only carried penalties for individuals who do not have health insurance by the deadlines set by the law, it also has penalties for some employers who do not offer health insurance to full-time employees. The Obama administration announced in February 2014 that the penalties against employers with 50 to 99 employees who do not offer health insurance coverage will be delayed until 2016, rather than going into effect in 2015 as is still the case for businesses with 100 or more employees. The I.R.S. followed up with an announcement that it may enforce penalties on those employers it suspects of cutting staff just to delay offering health insurance.

Employers to face penalties under ACA

The ACA instituted Employer Shared Responsibility Payments that employers with 50 or more full-time employees must pay with their federal business income taxes if they do not offer health insurance to their employees, or if they provide health insurance that is too expensive. The annual fee for not offering health insurance is $2,000 per employee, with the first 30 employees exempted.

If any of the employees of the company take advantage of the health insurance subsidies provided by the ACA to help them defray the cost of an employer's program because it is too expensive, the employer must pay the lesser of either $3,000 per employee who gets a subsidy or $750 for each employee of the business.

Justifying staffing decisions to the I.R.S.

Employers who reduce the number of employees to under 100 will have to prove to the I.R.S. they did so for legitimate business reasons, rather than as an attempt to avoid penalties under the ACA, according to the I.R.S. announcement. Some of the reasons that the I.R.S. will accept as legitimate for reducing staff include:

  • Changes in the economic performance in the area where the employer operates
  • Terminating employees for underperformance
  • Selling a division of a business
  • Similar business decisions unrelated to insurance coverage penalties

Speak to an attorney

Tax laws are constantly changing - particularly those associated with the ACA. It can be difficult for employers to keep up and make sense of their obligations. Employers can quickly find themselves in trouble with the I.R.S. for innocent business choices, as the I.R.S.'s announcement to scrutinize employers' staffing decisions shows. People who are having issues with the I.R.S. need the assistance of a seasoned tax attorney advocating for their best interests. If you have questions about tax issues, consult a skilled tax attorney who can help you reach a resolution to your problems.