I’m the owner of a small business, and providing health insurance to my employees is a difficult task. I’ve heard about something in the new 21st Century Cures Act that might make it easier to accomplish. Will you explain?
While most of the media attention around the 21st Century Cures Act focused on the provisions related to medical innovation, the law also included good news for small employers previously prohibited from offering Health Reimbursement Arrangements (HRAs). Beginning January 1, qualified small businesses CAN use HRAs to reimburse employees who purchase insurance coverage, instead of providing the more traditional, and expensive, group health plans.
HRAs are a way for small companies to reimburse their workers’ medical expenses, including health insurance premiums, up to a certain amount each year. The reimbursements are excludable from the employees’ taxable income, and untapped amounts can be rolled over to future years. HRAs generally have been considered to be group health plans for tax purposes.
But the Affordable Care Act (ACA) prohibits group health plans from imposing annual or lifetime benefits limits and requires such plans to provide certain preventive services without any cost-sharing by employees. According to previous IRS guidance, “standalone HRAs” — those not tied to an existing group health plan — didn’t comply with these rules, even if the HRAs were used to purchase health insurance coverage that did comply.
The IRS position was troublesome for smaller businesses that struggled to pay for traditional group health plans. The changes in the 21st Century Cures Act give these employers a third option for providing one of the benefits most valued by today’s employees.
New option, new requirements
These new “Qualified Small Employer Health Reimbursement Arrangements” (QSEHRAs) won’t be treated as group health plans. Employees won’t be required to pay taxes on the employer’s contribution, nor will the employer be liable for payroll taxes on it.
QSEHRAs must satisfy a number of requirements. The employer must have fewer than 50 full-time employees. The employer cannot offer a separate group health plan to any of its employees. The HRA is provided on the same terms to all eligible employees, except that an employee’s benefit can vary based on criteria such as age and family size. The HRA is funded solely by the employer, with no salary-reduction contributions. The HRA provides payment or reimbursement for medical care expenses, which can include individual health insurance as well as out-of-pocket expenses. The amount of payments and reimbursements don’t exceed $4,950 for individual employees or $10,000 for family coverage.
In addition, when an employer offers an HRA, all employees generally must be eligible unless they’re within their first 90 days on the job, under age 25, part-time or seasonal workers, covered in a collective bargaining unit, or are certain nonresident aliens.
New reporting obligations
At least 90 days before each plan year begins (or on the first day a new employee is eligible), the employer must provide eligible employees a notice stating the amount of the employee’s permitted benefit under the HRA for the year, that the employee should provide information about that amount to any Health Insurance Exchange to which the employee applies for advance payment of the premium assistance tax credit (also referred to as a federal subsidy), and that, if the employee isn’t covered under the minimum essential coverage for any month, the employee may be subject to tax under Internal Revenue Code Section 5000A for that month and reimbursements may be included in gross income.
Failure to provide timely notice will subject an employer to a $50 penalty for each employee, up to $2,500 annually. Notice will be considered timely for 2017 if provided by March 13, 2017.
In addition, employers must report the value of any QSEHRA benefit on employees’ Forms W-2, beginning with forms issued in January 2018 for 2017.
Although President Trump and the Republican Congress have promised to repeal the ACA, the QSEHRA exception in the 21st Century Cures Act could complicate matters. If smaller employers take advantage of the exception, the individual insurance market is likely to expand and the risk pool is likely to diversify. This could both stabilize premiums and give more citizens a stake in preserving some of the ACA’s provisions.
Stacey Huff is the Advisory Services Director at MCM CPAs & Advisors, where she works closely with the firm’s HR consultants. Her practice expertise is currently in tax compliance as it relates to the Affordable Care Act, and her experience also includes retirement plan administration and not-for-profit tax compliance and consulting.
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