Small business groups are sounding a warning about an obscure Internal Revenue Service rule that takes effect Wednesday imposing heavy fines on small businesses for helping defray the cost of their workers’ insurance or medical expenses.

The National Federation of Independent Business said small businesses that get caught helping their workers buy insurance or pay medical bills can be fined 18 times more than larger employers that don’t provide coverage at all.

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

Under the rule, which the NFIB noted appears nowhere in the Affordable Care Act, employers who do not offer a group health plan, but give their workers additional pay to compensate for the purchase of health insurance or direct medical expenses, can be fined $100 per day, per employee. Over the course of a year that can add up to $36,500 per employee, up to $500,000 in total. In contrast, the penalty on businesses for failing to comply with the employer mandate is only $2,000 per year.

The National Association for the Self-Employed,  an advocacy group for the self-employed and micro-business community, is calling on the Treasury Department to immediately delay the policy until the end of the year in order for bipartisan legislation to be passed by Congress to remedy the situation.

“Currently in Congress bipartisan legislation has been introduced that would fix this unintended consequence of the Affordable Care Act,” said NASE vice president for government relations and public affairs Katie Vlietstra. “The Treasury Department should immediately announce a delay in this rule until the end of the year in order for the legislative process to work and for small businesses to be spared the devastating effects this IRS rule could have across America’s Main Street.”

In February, the U.S. Department of the Treasury’s announced a delay in the enforcement of the technical guidance issued in September 2013 for health reimbursement arrangements. The February delay expires July 1 and fines could begin to be imposed on businesses not meeting the requirement for group coverage plans that provide health care assistance for their employees through the use of traditional HRA accounts.

“It’s hard to believe Congress or the President intended to punish employers much more severely for actually helping their workers,” said Kuhlman. “Nevertheless, that’s the consequence and most small businesses don’t know it.”

According to the NFIB’s research, 14 percent of small businesses that do not offer group insurance reimburse their workers instead, unaware of the potential pitfalls of the regulation.

“Reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headache of setting up a costly group plan,” said Kuhlman. “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.”

The NFIB noted that Congress would be able to remedy the situation by repealing the IRS rule, and there is legislation in both houses awaiting action. 

The bipartisan Small Business Healthcare Relief Act, introduced last week in Congress by Rep. Charles Boustany, R-La., and Mike Thompson, D-Calif., in the House and Sen. Charles Grassley, R-Iowa, and Heidi Heitkamp, D-N.D., in the Senate, would provide a remedy to this situation by enabling small businesses to continue to use health reimbursement arrangements, which allow employers to provide pre-tax dollars to employees to pay for medical care and services.

“Health reimbursement accounts have historically been a very powerful and effective tool for the small business community,” said Vliestra. “HRAs allow small business owners to do the right thing by helping provide financial assistance to their employees for qualified health care expenses.  Which should be applauding them for wanting to help their employees access affordable health care coverage, not punish them with arbitrary IRS policies that could cripple their business.”

When the technical guidance was originally issued back in 2014, the NASE provided comment on the guidance stating that, “the technical guidance misinterprets the intent of the ACA as it relates to these types of tools (HRAs) used to provide financial support to employers with less than 50 employees.”

“If there’s an opportunity for a bipartisan improvement toward affordable health care, this has to be it,” said Kuhlman. “There’s no real justification for penalizing small businesses that do what the law’s strongest supporters claim to want, which is to help employees obtain coverage or pay medical bills. This is a rigid and thoughtless bureaucratic rule that undermines the purpose of the law, and it ought to be repealed immediately.”