Relief Granted for Health Reimbursement Arrangements Offered to Employees by Small Employers

Authored by Dannae L. Delano

Dec 16, 2016

This week, President Obama signed into law the 21st Century Cures Act which, in part, will allow small employers to use stand-alone health reimbursement arrangements (HRAs) to provide employees with a pre-tax subsidy of individual health insurance premiums.

Guidance interpreting the Affordable Care Act (ACA) prohibits employers from adopting stand-alone HRAs for employee medical coverage because they are employer health plans that do not comply with the ACA requirements regarding annual and lifetime coverage limits. Under this guidance, an employer HRA program is permitted only if it is integrated with another health plan sponsored by the employer that complies with these requirements, or if it meets another exception (such as covering only retirees or only excepted benefits such as dental and vision). Violating these requirements could subject an employer to an excise tax of $100 per day for each participant under Section 4980D of the Internal Revenue Code.

As of Jan. 1, 2017, a Qualified Small Employer HRA is exempt from compliance with the current guidance (including otherwise applicable excise taxes). A Qualified Small Employer HRA must:

  • Be offered by an employer that is NOT an “applicable large employer” for purposes of the ACA (meaning an employer who employed an average of less than 50 full-time and full-time equivalent employees during the preceding calendar year).
  • Be offered by an employer that does NOT sponsor a group health plan for ANY employees.
  • Be offered on the same terms to all eligible employees, provided that differences are permitted based on the cost of an employee’s individual health insurance coverage (cost can vary based on factors such as age or the number of family members covered).
  • Only employer contributions are allowed—that means no employee salary reduction contributions (including pre-tax cafeteria plan deductions) are permitted.
  • Only qualifying health expenses (as defined in § 213(d) of the Internal Revenue Code) may be reimbursed, including premiums for individual health insurance policies. It also appears that Medicare premiums and TRICARE expenses would be reimbursable.
  • Maximum reimbursement amounts are $4,950 per year for single employees and $10,000 for family coverage (limits are prorated for partial years of coverage and include cost of living adjustments after 2016).
  • Only certain categories of employees may be excluded from coverage.
  • A Qualified Small Employer HRA is exempt from COBRA compliance.
  • A number of reporting and disclosure requirements also apply, including an annual written notice to employees 90 days in advance of the plan year.

Employees who purchase health insurance through the Marketplace/Exchange will receive a smaller premium tax credit toward the cost of that insurance due to their participation in a Qualified Small Employer HRA.

In 2015, small employers reimbursing employee premiums for individual health insurance or Medicare were granted excise tax relief until June 30, 2015. The new law now extends that excise tax relief to Dec. 31, 2016. Consequently, these small employers will not be subject to the $100 per day excise tax for any plan year beginning before Jan. 1, 2017. 

In addition to the small employer excise tax relief described above, excise tax relief was granted in 2015 to certain other arrangements offered by both large and small employers that reimburse:

  • Individual health insurance policies for more than 2 percent shareholders of S corporations;
  • Premiums for Medicare and Medicare supplemental policies; and
  • Medical expenses for employees covered by TRICARE.

Unfortunately, the new law does not specifically address the status of these types of reimbursement arrangements.

Because of the ACA, many small employers have been prohibited from using reimbursement arrangements that previously were long-standing and effective methods of providing employees with health care benefits. The new law is a welcome modification to the ACA since it gives small employers excise tax relief plus a method for providing health benefits to their employees.

 If you have any questions about health reimbursement arrangements or any other employee benefits matter, please do not hesitate to contact Dannae Delano

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