Obamacare penalties for small companies that pay Obamacare premiums?

I’m wondering if small companies have been put at a disadvantage by Obamacare. It used to be the case that a small company could compensate employees with tax-free cash by paying their individual health insurance premiums, just as a big company can compensate employees with tax-free cash by paying their group health insurance premiums. “Large Penalties Await Employers Who Reimbursed Certain Employee Health Insurance Premiums In 2014” (Forbes) suggests that companies that continue to do what they had been doing for decades are now subject to a $36,500/employee annual penalty.

What do readers know about this? This would seem to put small companies at a significant competitive disadvantage to big companies unless there is some straightforward way for a typical small-company W-2 employee to deduct health insurance premiums paid (the 1040 form has a line for “self-employed health insurance deduction” but it seems to be for 1099 workers or S-corporation owners).

Is this another example of the “go big or go home” U.S. economy? Or is there some straightforward way for a small company to get back to parity in terms of the tax treatment of its employee compensation?

[Separately, let’s put the $36,500 into context. The median pre-tax household income in the U.S. is about $52,000 (Wikipedia). So the penalty is a little smaller than the after-tax median household income. But the median net compensation for an individual worker, according to the Social Security Administration, is about $28,850. So the penalty is actually more than what a company would typically pay a worker. Someone who had a one-night sexual encounter in New York State with a partner earning $214,706 per year and obtained custody of the resulting child would collect the same $36,500 in annual tax-free child support. A typical welfare family costs the taxpayers a lot more than $36,500 per year but as of 2013, the total value to the recipient of a welfare package was more than $36,500 in only 11 states (CATO Institute study).]


  1. Jack D

    May 23, 2016 @ 8:57 am


    This is a somewhat obscure situation – where the employer doesn’t provide a health care plan but instead reimburses you for the one you buy yourself. Normally the employer provides the plan (and this is what Obamacare forces you to do even more). As long as the small employer provides the plan, it will be under no tax disadvantage vs a large employer.

  2. Barak Pearlmutter

    May 23, 2016 @ 8:59 am


    One way out is to keep all employees part time. So if companies A and B would each be happy to hire either person X or Y full time, instead they each hire both half-time.

    This is in fact what has happened to workers near the bottom of the pyramid: retail, restaurants, etc.

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