Reimbursing employees’ health insurance premiums and other health costs on a pre-tax basis again is available, thanks to the 21st Century Cures Act signed recently by President Obama. The law becomes effective January 1, 2017. A few words of caution - the law applies only to “small” employers, and it contains other significant limitations that could render it inappropriate in many circumstances.
In the wake of the Affordable Care Act’s (ACA) enactment, the IRS and the U.S. Department of Labor delivered a rather unpleasant surprise to many, namely, that employers’ reimbursements or payments of employees’ individual health insurance premiums would be treated as taxable income to such employees. This practice has been known as a health reimbursement arrangement, or “HRA.”
This government edict interpreted the word “plan” under the ACA’s so-called market reforms as covering HRAs. It affected small employers that were otherwise exempt under the ACA. The government’s interpretation constituted an about-face from the long-standing legal treatment of HRAs as a pre-tax benefit, however, and on pain of costly fines for noncompliant employers. For more background information, please see our law firm’s website article July 7, 2015.
As a lovely Christmas present, the newly enacted law reverts back to treating HRAs as a pre-tax benefit, and it even provides penalty waivers for prior noncompliance. The new law contains several requirements and limiting features:
- The employer must have less than 50 full-time-equivalent employees;
- The employer must not offer group health insurance coverage to employees;
- The employee must provide proof of having his or her own health insurance coverage;
- The employer must offer HRA benefits to all employees equally (although some benefit variance is allowed based on each employee’s age and family size);
- The employer must prospectively establish an HRA plan;
- The employer must establish employer-owned HRA accounts for participating employees, but not as part of any salary reduction;
- The HRAs may be used to reimburse employees (or directly pay) for their health insurance premiums or other “qualified medical expenses” (see IRS Publication 502;
- The employer’s reimbursable limit is $4950 for individuals and $10,000 for a family plan (with these amounts indexed for inflation); and
- Unused HRA account balances may be carried over to future years.
HRAs thus may help employees with their health insurance premiums and other medical expenses, since HRA benefits are excluded from employees’ gross income (although reportable on IRS Form W-2s). Correspondingly, employers benefit since they will not owe employer-side taxes on HRA employee contributions.
The ACA will likely remain controversial in many other respects, and future health care reform efforts may be on the horizon. But for now, HRAs can thankfully provide a valuable employee benefit for small employers – at least those that can pivot to implement this new-again benefit. So welcome back, HRAs!