President Obama recently signed the 21st Century Cures Act into law. The new law allows qualified small employers to offer health reimbursement arrangements (HRAs) without facing penalties for non-compliance with the Affordable Care Act. Prior to the enactment of this law, an employer could only offer an HRA if they also offered coverage under a group health plan and met requirements of the Affordable Care Act.
In an HRA, an employer is able to reimburse health insurance premiums and certain other qualified medical expenses on a pre-tax basis for eligible employees. In circumstances where an employee is not covered under minimum essential health coverage, their reimbursements are considered taxable and included in gross income.
Eligible Employers and Employees
In order to qualify under the new law, an employer must be considered a small employer with less than 50 full-time employees1. Additionally, the small employer must not offer a group health plan to any of its employees.
All eligible employees, typically those considered full-time, must be eligible for the same terms of the plan. An employer may exclude certain part-time or seasonal employees as well as those under age 25 or with fewer than 90 days of employment.
In order to be considered a qualified reimbursement arrangement, the funding must be provided solely by the employer with no salary reduction from the employee. Additionally, the funds should be paid or reimbursed after the employee has provided proof of coverage for eligible medical expenses of the employee or employee’s family members.
The new law places a maximum annual reimbursement limit of $4,950 (or $10,000 in instances where the arrangement provides for reimbursements for employee’s family members)2. These limits are pro-rated if the employee is not covered under the employer HRA for the entire year.
Coordination with the Marketplace
Employees who apply for advance premium credits will need to report the reimbursements to the Marketplace. The employee’s premium credit will then be reduced for reimbursements received by the employer. As a result, the employee could be responsible for the same level of premiums as they were prior to receiving reimbursements.
Effective Date and Implementation
These changes are effective for plan years beginning after December 31, 2016. Plan years beginning on or before December 31, 2016 may seek transition relief under prior guidance. Employers should provide written notice to each eligible employee detailing the plan limits and certain reporting requirements prior to plan implementation.
ABC Company owns a bakery with 25 full-time employees and does not offer a health insurance plan. Beginning January 1, 2017, ABC Company implements an HRA and offers the arrangement to all eligible employees. ABC Company reimburses each eligible employee up to $4,950 of qualified expenses with no reduction of the employee’s wages. As a result of the 21st Century Cures Act, ABC Company is exempt from the $100 per day penalty for non-compliance with the ACA rules.
If you have questions, please contact Michele Graham, CPA, Matt Folz, CPA or Mike Vogel, CPA at 800.880.7800.
1Large employers must continue to comply with the ACA requirements when offering HRAs to their employees to avoid penalties of $100 per day per employee for non-compliance.
2The annual limits are scheduled to be adjusted for inflation beginning in years after 2016.