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Changes to the Laws Make Health Reimbursement Arrangements (HRAs) Possible for Qualified Small Employers

by
Steward Financial
on
6/15/2017
Changes to the Laws Make Health Reimbursement Arrangements (HRAs) Possible for Qualified Small Employers

One of the criticisms of the Affordable Care Act has long been the fact that certain restrictions have worked against small businesses, and a commonly-cited example of this has been the provision that prevented them from offering HRAs, or health reimbursement arrangements. Those original provisions viewed HRAs as not eligible for being viewed as a group health plan because of two key ways that they do not meet the ACA’s market-reform requirements.

The two elements that exclude them from eligibility are that they:

  • Do not offer preventive-care services without the employee having to shoulder certain cost-sharing elements
  • Place limits on how much the insured can receive in actual dollar benefits

Though HRAs had long been popular offerings for small businesses, those that continued to offer them under the ACA were subject to having to pay a penalty of $100 per day per employee, with a maximum excise tax of $36,500 per year. This amount is quite obviously a budget breaker for a typical small business, and as a result most employers that had previously offered this type of coverage simply stopped making it available, therefore leaving their employees without benefits for their healthcare.

Since this result ran counter to the goal of providing more health insurance coverage rather than less, Congress worked to find a solution, and the answer they came up with was the 21st Century Cures Act. This law took effect at the start of 2017. It established a specific category and type of benefit known as a “qualified small employer HRA” that is not required to meet the same standards as those of other group health plans, and therefore does not fall under the excise tax requirements.

The eligibility requirements for this classification are fairly straightforward.  The first rule for their use indicates that only employers with fewer than 50 full-time equivalent employees and who do not offer any alternative group health plan as an employment benefit are able to offer them.

Beyond that requirement, an employer offering a small-employer HRA must make them available to all eligible employees with the exception of those who have not yet completed 90 days of service, those who are under the age of 25, and those who work on average less than 30 hours per week. They also need not be offered to seasonal workers who are working six or fewer months of the year, those covered by a collective bargaining unit, or certain nonresident aliens.

The small-employer HRAs have other qualifications that they must meet. They must not be partially funded through reductions in employees’ salaries: they must be completely funded by the employer. The HRA rules must spell out that funds that are to be distributed to employees only upon receipt of documentation of the medical expense incurred, and those reimbursements are limited to no more than $4,950 per year (where employers offer coverage for the employees’ family members, that annual maximum increases to $10,000). The maximum reimbursements amounts are to be adjusted each year for inflation, and are to be prorated for any employee who does not work for the employer for a full year.

From the employee’s perspective, for any month that their employer provides them with this qualifying HRA, their premium tax credit for the month will be reduced. It is the responsibility of any employee  currently purchasing health insurance on their own, through the Marketplace, to let the Marketplace know if they become eligible for an HRA benefit during any part of the year.

There are special rules for how certain types of businesses address HRA reimbursements. Owners and officers of Subchapter S corporations who have more than a 2% share of the business, as well as partners in limited liability companies and other partnerships are required to treat HRA reimbursements as taxable income. This means that they will be able to take an above-the-line tax deduction on any income that was used to help pay for their health insurance.

Though the Affordable Care Act was designed to provide greater health insurance benefits, many of its rules are frustratingly complex. If you need information about how this latest change impacts you or your business, contact a qualified accountant to set up a consultation and discuss your concerns.

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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