Written by: Shari McVey
On December 13, President Obama signed into law the "21st Century Cures Act". In addition to providing a medical innovation package that funds medical research, accelerates cutting-edge treatments for rare diseases, and makes significant reforms to the mental health system, the act also allows small employers to provide Health Reimbursement Arrangements (HRAs) to their employees without facing penalties for failing to satisfy certain Affordable Care Act (ACA) requirements. Here we will explore what effects that will have on small business HRAs:
Small Employer HRAs Exempted from Group Health Plan Requirements
HRAs are arrangements under which an employer agrees to reimburse medical expenses (including health insurance premiums) up to a certain amount per year, with unused amounts available to reimburse medical expenses in future years. The reimbursement is excludable from the employee's income.
HRAs generally are considered to be group health plans under provisions of which were incorporated into the ACA code.
Under the new 21st Century Cures Act, a "qualified small employer HRA" is not treated as a group health plan for income tax purposes. A qualified small employer HRA would meet the following requirements:
- The employer employs fewer than 50 employees - and does not offer a group health plan to any of its employees
- The HRA is provided on the same terms to all eligible employees. (Employees may be excluded under these criterions: employees who haven't completed 90 days of service, employees who haven't attained age 25, part-time or seasonal workers, employees covered in a collective bargaining unit, and certain nonresident aliens.)
- The HRA is funded solely by an eligible employer, and no salary reduction contributions may be made under the HRA.
- The HRA provides, after the employee provides proof of coverage, for the payment of, or reimbursement of, expenses for medical care incurred by the eligible employee or the employee's family members
- The amount of payments and reimbursements do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee). For any year beginning after 2016, the above dollar amounts are subject to cost of living increases. For employees who are covered by a qualified arrangement for less than an entire year, the above dollar amounts are prorated.
The exemption of small employer HRAs from the group health plan requirements is generally effective for years beginning after Dec. 31, 2016.
Small Employer HRA Reporting & Notice Requirements
A small employer funding a qualified HRA for any year must, not later than 90 days before the beginning of the year (in the case of an employee who is not eligible to participate in the arrangement as of the beginning of such year, the date on which the employee is first eligible), provide a written notice to each eligible employee which includes:
- a statement of the amount of the employee's permitted benefit under the arrangement for the year
- a statement that the eligible employee should provide the information described in the clause to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit
- a statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax for such month, and reimbursements under the arrangement may be includible in gross income.
Employers also have to report the total amount of permitted benefit for the year under a qualified arrangement on their employees' W-2s.
If an employer fails to provide the required notice (unless the failure is shown to be due to a reasonable cause) the employer will be subject to a $50 per-employee, per-incident-of-failure penalty, subject to a $2,500 calendar year maximum.
The notice and reporting requirements are effective for years beginning after Dec. 31, 2016