The House and the Senate recently passed, and President Obama has signed, the “21st Century Cures Act”, which includes a provision exempting small employer health reimbursement arrangements (HRAs) from the Affordable Care Act’s (ACA’s) group plan rules, and from the excise tax imposed under Code Section 4980D for failure to comply with those rules. See our prior posts on the Section 4980D excise tax here, here and here.
HRAs typically provide reimbursement for medical expenses (which can include premiums for insurance coverage). HRA reimbursements are exclude-able from the employee’s income, and unused amounts roll over from one year to the next. HRAs generally are considered to be group health plans for purposes of the tax Code and ERISA.
The ACA market reforms, which generally apply to group health plans, include provisions that a group health plan (including HRAs) (1) may not establish an annual limit on the dollar amount of benefits for any individual; and (2) must provide certain preventive services without imposing any cost-sharing requirements for these services. Code Section 4980D imposes an excise tax on any failure of a group health plan to meet these requirements.
The IRS has previously distinguished between employer-funded HRAs that are “integrated” with other coverage as part of a group health plan (and which therefore can meet the annual limit rules) and so called “stand-alone” HRAs. A “stand alone” HRA almost certainly does not meet the ACA group coverage mandates.
The New Law
The 21st Century Cures Act provides relief from the Section 4980D excise tax effective for tax years after December 31, 2016 for small employers that sponsor a qualified small employer HRA. In addition, previous transition relief for small employers, i.e. those that are not an Applicable Large Employer (ALE) under the ACA, is extended through December 31, 2016.
Therefore, for plan years beginning on or before December 31, 2016, HRAs maintained by small employers with fewer than 50 employees will not incur the Section. 4980D excise tax even if the plans are not qualified small employer HRAs. For tax years after December 31, 2016, small employer HRAs will need to satisfy the requirements of a qualified small employer HRA.
Qualified Small Employer HRA
A qualified small employer HRA must meet all of the following requirements:
(1) Be maintained by an employer that is not an ALE (i.e., it employs fewer than 50 employees), and does not offer a group health plan to any of its employees.
(2) Be provided on the same terms to all eligible employees. For this purpose, small employers may exclude employees who are under age 25, employees have not completed 90 days of service, part-time or seasonal employees, collective bargaining unit employees, and certain nonresident aliens.
(3) Be funded solely by an eligible employer. No employee salary reduction contributions may be made under the HRA.
(4) Provide for the payment of, or reimbursement of, an eligible employee for expenses for medical care (which can include premiums) incurred by the eligible employee or the eligible employee’s family members.
(5) The amount of payments and reimbursements do not exceed $4,950 ($10,000 if the HRA also provides for payments or reimbursements for family members of the employee). These amounts will be adjusted for cost of living increases in the future. An HRA can vary the reimbursement to a particular individual based on variations in the price of an insurance policy in the relevant individual health insurance market with respect to: (i) age or (ii) the number of family members covered by the HRA, without violating this requirement that the HRA be provided on the same terms to each eligible employee.
Coordination With Other Rules
If an employee covered by a qualified HRA does not maintain “minimum essential coverage” within the meaning of Code Section 5000A(f), they will be subject to the individual mandate tax penalty under existing law. Under the new law, their HRA reimbursements will also be taxable income to them.
In addition, for any month that an employee is provided affordable individual health insurance coverage under a qualified HRA, he is not eligible for a premium assistance tax credit under Code Section 36B.
Employer Reporting Requirements
For years beginning after December 31, 2016, an employer funding a qualified HRA must, not later than 90 days before the beginning of the year, provide a written notice to each eligible employee that includes:
(1) The amount of the employee’s permitted benefit under the HRA for the year;
(2) A statement that the eligible employee should provide the amount of the employee’s permitted benefit under the HRA to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and
(3) A statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to the individual mandate tax penalty for such month, and reimbursements under the HRA may be include-able in gross income.
For calendar years that begin after December 31, 2016, employers also have to report contributions to a qualified HRA on their employees’ W-2s.
More… text of the 21st Century Cures Act.
Erwin Kratz practices exclusively in the areas of ERISA and employee benefits law, focusing on tax and regulatory matters relating to qualified and nonqualified deferred compensation and welfare benefits.View all posts by Erwin