A new law, The 21st Century Cures Act, signed in December by President Obama has eased some restrictions and provided some flexibility for small employers who want to offer their employees financial assistance through a standalone health reimbursement plan beginning in 2017.
A standalone HRA – Health Reimbursement Arrangement – is one that is not paired with a health insurance plan.
HRAs are a way for small employers who cannot afford to provide a group benefit plan to still help offset medical expenses incurred by their employees. Under these arrangements, an employer agrees to reimburse medical expenses, including health insurance premiums, up to a certain amount per year. The reimbursement for medical expenses are not included in the employee’s taxable income.
So, under the new law, qualified small employers can use standalone HRAs to reimburse employees for purchasing individual insurance coverage, rather than providing them with costly group health plans.
A “qualified small employer” is one that had fewer than 50 full-time and full-time equivalent employees during the preceding calendar year and does not offer a group health plan to any of its employees.
As a result of the new law, qualified small employers can now provide HRAs without facing steep penalties. Under the Affordable Care Act, all employers – whether they are considered large or small employers – had to conform to the requirements of the ACA if they were to offer group health plans. As a result, many HRAs – favored by many employers with fewer than 50 full-time employees – did not comply as group health plans under the ACA, resulting in hefty excise tax for employers who maintained these arrangements.
Through the new Cures Act, though, a small employer HRA is no longer defined as a group health plan, meaning these arrangements are now an option for small business owners. Qualified HRA plans beginning after Dec. 31, 2016, will not face an excise tax.
A qualified small employer HRA must adhere to the following requirements:
- It is maintained by an employer with fewer than 50 employees and no group health plan is offered to any of those employees;
- It is offered to all eligible employees; however, the employer may exclude employees who haven’t completed 90 days of service, employees under the age 25, part-time or seasonal employees, employees covered in a collective bargaining unit and certain nonresident aliens.
- It is funded solely by the employer and no salary reduction contributions are made under the HRA;
- The amount of payments and reimbursements do not exceed $4,950 per employee (or $10,000 for those that provide payments or reimbursements for an employee’s family members). Furthermore, for any year beginning after 2016, these dollar amounts are subject to cost of living increases.
If offering an HRA, employers must do the following:
- Provide written notice to each eligible employee that includes a statement of the amount of the employee’s permitted benefit under the HRA for the year;
- Advise the employee to provide information about the employer-offered HRA to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and
- Inform the employee that if he or she is not covered under minimum essential coverage for any month, the employee may be subject to tax under the individual mandate for that month.
Failure by the employer to make these disclosures can result in a $50 per-employee, per-incident of failure penalty, up to a $2,500 calendar year maximum.
Employers also need to report the total amount of permitted benefit under an HRA on their employees’ W-2s. However, keep in mind that benefit isn’t included in the taxable wages on the employee’s W-2. It is simply required to be included on the W-2 for informational purposes.
The Cures Act also states that reimbursements from an HRA cannot be treated as paid or reimbursed under the employer-provided coverage for any medical expenses during a month when the employee does not have minimum essential coverage as required under the ACA.
All in all, this is a good option for small business owners who want to help their employees with medical expenses and have not been able to do so for fear of financial penalty. Please let us know if you would like to learn if this is a good option for your business.