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Small Employer May Now Offer HRAs

While many Americans were focused on the Presidential election and transition, Congress and President Obama in mid-December quietly agreed on significant legislation to boost funding for medical research, make approval of experimental treatments easier and reform mental health policy. What is the tax angle?

The 21st Century Cures Act also makes it possible for small employers to establish stand-alone Health Reimbursement Accounts (HRAs) by exempting them from the Affordable Care Act (ACA) requirements for group health plans.

Under the new law, an employer can establish a small employer health reimbursement arrangement (or QSEHRA) if the employer meets the following criteria:

  • The employer has less than 50 employees and is not subject to the large employer mandate under the ACA.
  • The employer does not offer a group health plan to any employees.

The maximum reimbursement allowed per year for the HRAs is $4,950 for an individual or $10,000 if the plan covers an employee’s family members. If employees are covered by an HRA, they will not be eligible for health insurance subsidies for insurance purchased under an exchange, but they may use the HRA funds to purchase insurance on an exchange.

The plans must be offered to all employees, except:

  • part-time or seasonal employees;
  • employees under age 25;
  • those within the first 90 days of service with the employer; and
  • employees who are part of a collective bargaining agreement.

What is an HRA?

Health Reimbursement Accounts (HRAs) are employer-funded group health plans that reimburse employees for medical expense, including health insurance premiums, up to a certain amount each year. The reimbursements are tax-free to employees, and unused amounts may be rolled over to be used in later years. The employer funds and owns the account. (HRAs are also known as Health Reimbursement Arrangements.)

Legislation Overturns IRS, DOL Guidance

The 21st Century Act overturns 2013 guidance issued by the Internal Revenue Service (IRS) and the Department of Labor (DOL) stating that these arrangements violate the ACA insurance market reforms and are subject to penalties. The IRS and DOL issued the rule to prevent employers from substituting HRAs for regular employer health insurance plans. The ACA rules for large employers require that plans be “affordable” and that they offer “minimum essential coverage.” Small employer HRAs will not be subject to these rules. Note that the IRS guidance still applies to large employers and prohibits employers with 50 or more employees from using HRAs to fulfill their employee coverage requirement.

For DOL guidance on the new Act, see Question 3 of its Facts about the Affordable Care Act.

Effective Date

The new law became effective on January 1, 2017. Employers will be required to report the value of any HRA benefit on their employees’ W-2s beginning in 2017. Thus, reporting will start for Forms W-2 issued in January 2018 for tax year 2017.

About the Blogger

Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, a tax Professor with Georgia State University’s J. Mack Robinson College of Business, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments.

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