New Law Permits Stand-Alone Health Reimbursement Arrangements (HRAs) For Small Employers
On December 13, 2016 President Obama signed into law the 21st Century Cures Act. The law had been approved with bipartisan support in the House by a vote of 392 to 26 and in the Senate by a vote of 94 to 5. The law addresses a number of health care issues such as streamlining the process for FDA approval of drugs and medical devices, addressing treatment for mental health, substance abuse and eating disorders, and providing funding for the National Institutes of Health.
The 21st Century Cures Act also includes amendments to the Affordable Care Act and Internal Revenue Code to permit stand-alone health reimbursement arrangements (HRAs) for small employers. Small employers who do not wish to offer their own health plan to employees can now provide employees a pre-tax subsidy of individual health insurance premiums by establishing a Qualified Small Employer Health Reimbursement Arrangement beginning on or after January 1, 2017.
Guidance interpreting the Affordable Care Act has taken the position that the ACA prohibits employers from adopting stand-alone HRAs for employee medical coverage because they are employer health plans that do not comply with the ACA requirements regarding annual and lifetime coverage limits. See http://benefitsnotes.com/2013/10/no-more-pre-tax-premiums-for-individual-insurance-policies/ Under this guidance, an employer HRA program is permitted only if it is integrated with another health plan sponsored by the employer that complies with these requirements, or if it meets another exception (such as covering only retirees or covering only excepted benefits such as dental and vision). Violating these requirements could subject an employer to an excise tax of $100 per day for each participant under Section 4980D of the Internal Revenue Code.
The 21st Century Cures Act excludes a Qualified Small Employer HRA from these requirements. A Qualified Small Employer HRA must meet a number of requirements. These are:
1. It can only be offered by small employers. To qualify, the employer must not be an “applicable large employer” which is defined in Section 4908H(c)(2) of the Internal Revenue Code as an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year.
2. It can only be offered by small employers who do not offer any group health plan to any employees.
3. The program must be provided on the same terms to all eligible employees. Differences are permitted based on the cost of an employee’s individual health insurance coverage which may vary based on factors such as age or the number of family members covered.
4. The program must be solely employer funded. No employee salary reduction contributions (including pre-tax cafeteria plan deductions) are permitted. The employee must pay for additional costs for the individual health insurance coverage outside the program.
5. The program must be limited to qualifying health expenses described in section 213(d) of the code for the employee and eligible family members.
6. The benefits available under the program cannot exceed $4,950 per year for single employees and $10,000 for family coverage. These limits are prorated for partial years of coverage and include cost of living adjustments after 2016.
7. The program is permitted to exclude from coverage:
a. Part-time and seasonal employees;
b. New employees with less than 90 days of service;
c. Employees younger than age 25;
d. Union employees; and
e. Non-resident aliens.
There are a number of reporting and disclosure requirements that apply to a Qualified Small Employer HRA. These include:
1. The employer must provide a notification to each eligible employee no later than 90 days prior to the beginning of each year (or for employees not eligible, the date they first become eligible). This notice must include:
a. A statement of the amount available from the HRA for the year.
b. A statement hat the eligible employee must disclose that amount to any exchange from which they are receiving coverage. (Premium credits may be impacted by amounts provided by the HRA).
c. A statement that an employee not covered by minimum essential coverage may be subject to tax.
2. The employer must include the HRA benefits in the W-2 reporting of heath benefits after December 31, 2016.
The new law also provides an exemption from COBRA for Qualified Small Employer HRAs. These programs will not be subject to the COBRA notice requirements or the extension of coverage after the employee’s coverage would end.
Employers wishing to provide more comprehensive health benefits for employees will continue to need to do so through a traditional employer-sponsored group health plan. However, for those small employers unable to provide this coverage, the 21st Century Cares Act provides a means to provide some financial support for employees’ health coverage on a pre-tax basis.
Small employers adopting a Qualified Small Employer HRA need to be sure to document their compliance with these requirements and the other requirements that apply generally to HRA programs. Employers should formally adopt plan documents addressing these requirements and not run the program informally through premium reimbursements made outside a formal plan or through incomplete descriptions of the program in employee handbooks or other employment policies.
Contact Todd Martin for more information.