Early Christmas for Small Businesses – HRAs to Make a Come Back in 2017
Recently, President Obama signed the 21st Century Cures Act into law. Among other things, the law amends the ACA and the Internal Revenue Code so that small businesses will be able to again offer stand-alone health reimbursement arrangements (HRAs). Prior to the ACA, many small employers (not subject to the employer mandates) sponsored stand-alone HRAs, rather than group health plans, to help subsidize their employees’ premiums for non-employer sponsored health plans. Under the ACA, these stand-alone HRAs were considered group health plans. By design, stand-alone HRAs simply cannot meet the requirements of the ACA market reform provisions subjecting employers to penalties of up to $100 per participant per violation (i.e., $36,500 per participant per year). As a result, small employers were forced to pull the plug on these arrangements.
Beginning January 1, 2017, small employers that do not offer their own health plan may establish an HRA plan, referred to as Qualified Small Employer Health Reimbursement Arrangement (QSEHRAs), to offer employees pre-tax benefits for eligible expenses. With the new name, come a new set of rules and limitations. As the name implies, these arrangements are only available to small employers (which is defined as an employer with fewer than 50 full-time equivalent employees). Further, QSEHRAs can only be offered by these small employers if they do not offer a group health plan. Similar to all other HRAs, no employee salary reductions are permitted, funding is limited to employer contributions and benefits are limited to Eligible Medical Expenses (refer to IRS Publication 502 for more on qualifying expenses). The annual benefits available under the program cannot exceed $4,950 for single employees and $10,000 for families, as adjusted for inflation. Employers may define eligible employees to exclude certain classifications of employees, such as part-time, seasonal, new employees (less than 90-days of service), union employees, non-resident aliens and employees under the age of twenty-five.
Many commentators consider this a common sense solution that helps small employers and their employees deal with the rising costs of health care and insurance. However, the rules and reporting requirements for QSEHRAs are different than stand-alone HRAs. Therefore, employers should seek out qualified counsel in establishing a compliant QSEHRA program for their employees.