Small Employers Can Use HRAs and Reimburse for Individual Health Insurance Premiums
The 21st Century Cures Act was signed into law in December of 2016. The legislation allows small employers to implement a standalone Health Reimbursement Arrangement (HRA) so employers can provide funds to employees to help pay for medical care expenses, including individual insurance premiums, effective January 1, 2017.
This is a welcome change for small employers, since the IRS and DOL had interpreted the Affordable Care Act (ACA) to effectively disallow HRAs if an employer did not offer a group health insurance plan, unless reimbursement was limited to retirees or to dental and vision expenses. They further interpreted the ACA to disallow employer reimbursement of employees’ individual health insurance premiums, either on a pretax or post-tax basis. This took away the ability of small employers to provide any sort of health benefits to employees, other than to offer health insurance. This legislation now provides small employers with an opportunity to offer health benefits to employees when they can’t otherwise afford to offer health insurance.
The new law establishes a new type of HRA called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) that is exempt from many of the ACA’s requirements. Not all employers can establish a QSEHRA. Only employers that are not an Applicable Large Employer (ALE) under the Employer Shared Responsibility rules are eligible for the new HRAs. An ALE is defined as an employer that had an average of 50 or more full-time equivalent (FTE) employees in the prior calendar year. So only employers with fewer than 50 FTEs can setup a QSEHRA. The qualified employer also cannot offer a group health plan to employees.
The QSEHRA must be offered on the same terms to all eligible employees. Eligible employees must be all employees other than those excludible under Code Section 105(h)(3)(B) [employees who have not worked for 90 days, employees under age 25, certain part-time or seasonal employees, certain union employees or nonresident aliens]. HRA benefits will be treated as being offered on the same terms if the coverage amount varies only because of a variation of insurance premiums due to the employee’s age or the number of family members covered.
Annual HRA reimbursements by the employer (HRAs are employer-funded health reimbursement arrangements) can’t exceed $4,950 per year (or $10,000 if expenses of family members are also reimbursed). The annual limits are prorated for an employee’s partial-year participation in the HRA. The annual limits will be adjusted for inflation going forward. Also, QSEHRA benefits are considered in calculating affordable employer coverage for employees and may make some employees ineligible for premium tax credits if they purchase State Exchange health insurance.
Benefits will be tax-free to the employee only if the employee has minimum essential health coverage, either an individual policy or a State Exchange health policy, and the employee provides proof of coverage to the employer. This is an important difference from the way HRAs used to work for small employers. Employers no longer need to fear a $100 per day penalty per employee for offering these types of arrangements, but the tax consequences to the employee will be different if the employee does not have health insurance.
An employer must provide eligible employees with a notice 90 days before the start of a coverage year (90 days from the date of enactment for 2017). The employer must also report reimbursements on the employees’ W-2s.
If you have any questions, please contact one of our Health Care Reform experts Pam Branshaw, Tom Krieg, Bob Buss, Keith Koszarek, or your Wipfli relationship executive.
