On December 13, 2016, the 21st Century Cures Act was signed into law by President Obama. In addition to accelerating cutting-edge treatments for rare diseases and adding significant reforms to the mental health system, this Act will allow small employers to provide standalone Health Reimbursement Arrangements (HRAs) to their employees with no penalties, effective December 31, 2016.
A standalone HRA is one that isn’t paired with a health insurance plan. So under the Cures Act, qualified small employers can use standalone HRAs to reimburse employees for purchasing individual insurance coverage, rather than providing them with costly group health plans. Offering a standalone HRA can be an attractive option to small employers that would struggle to pay for traditional group health plans or to administer their own self-insurance plans, yet want to offer some sort of health benefit to help attract and retain employees. The changes are effective as of January 1, 2017.
HRAs are arrangements in which employers agree to reimburse the medical expenses of employees up to certain amounts each year, with any unused balances rolling forward for availability in future years. The reimbursements provided to an employee for eligible medical expenses (including insurance premiums) are excludable from that employee’s income.
HRAs previously faced penalties for failing to meet certain requirements of the Affordable Care Act (ACA). Under Code Section 4980D of the ACA, all employers offering group health plans (including standalone HRAs) to employees that failed to meet the Code’s group health plan requirements could be hit with sizeable excise taxes by the IRS. However, this new Act provides relief from those penalties by distinguishing that qualified small employer HRAs are not considered group health plan, thereby protecting such plans from being hit with the hefty $100 per day per employee penalties.
In order to be considered a qualified small employer HRA, a plan must satisfy the following requirements:
- The plan must be maintained by an employer that is not considered an lieslicable Large Employer (ALE) (employs less than 50 employees) and that does not offer a group health plan to any of its employees;
- The plan must be provided on the same terms to all eligible employees;
- The plan must be funded solely by an eligible employer, and no salary reduction contributions may be made under the HRA;
- The plan must provide for the payment of, or reimbursement of, medical expenses incurred by the employee or the employee’s family members; and
- The total annual payments or reimbursements provided under the HRA must not exceed $4,950 for an individual employee or $10,000 total for an employee and his or her family.
The new law also amends the ACA to prevent employees (and their spouses and dependents) from claiming a premium tax credit for buying health insurance in a Health Insurance Exchange for months in which they receive affordable coverage under a standalone HRA. Additionally, it extends retroactive transitional relief, which had been provided to small employers with fewer than 50 employees. Thus, it protects small employers that set up HRAs prior to January 1, 2017, from penalties under the ACA.
Employee Notice & Reporting Requirements
An employer adopting to a newly approved HRA must provide written notice to eligible employees 90 days before the beginning of the year (or, for 2017, by March 13, 2017). The notice must include:
- A statement of the amount of the employee’s permitted benefit under the arrangement for the year;
- A statement requiring eligible employees to provide information to a Health Insurance Exchange for which he or she is applying for advance payment of the premium assistance tax credit, and
- A statement that, if the employee doesn’t receive minimum essential coverage for any month, 1) he or she may be subject to tax under the individual health insurance mandate for those months, and 2) reimbursements may be taxable.
Failure to provide notice could result in a penalty of $50 for each employee and for each incident. The amount of the benefit must also be disclosed as an informational supplement on the employee’s Form W-2.
Employers interested in implementing these new tax efficient HRA strategies should work with their Benefits Advisor to assist with these compliance requirements