On December 7, 2016 Congress passed the 21st Century Cures Act a complex piece of legislation addressing funding for disease research, changes to mental health systems, and regulations for pharmaceutical and medical device companies. Within the Act is a provision that presents a new mechanism, or rather exception, for small employers to fund employee health coverage with a “qualified small employer health reimbursement arrangement” (QSEHRA).
Though not specifically recognized in the Tax Code, a health reimbursement arrangement (HRA) is an IRS approved tax-advantaged arrangement (under general principles of Internal Revenue Code Sections 105 &106) funded solely by an employer to reimburse employees for their out of pocket medical expenses and individual insurance premiums. The HRA is tax exempt for the employee. However, in an effort to deter employers from canceling group health plans, forcing employees into the Individual Exchange (Marketplace), the Affordable Care Act (ACA) prohibited employers of any size from paying for an employee’s individual insurance premium, regardless of whether done via cash compensation or through premium reimbursement.
Employers without a group health plan, but using an HRA to finance individual premiums, are still sponsoring an “employer payment plan” subject to ACA market reforms. These payment plans failed to satisfy new regulations, such as the preventive services coverage mandate and the prohibition on annual limits for essential health benefits. Employers in violation could wind up with hefty excise taxes of $100/day per applicable employee.
The new Cures Act makes an exception for small employers under 50 full-time equivalent employees (therefor exempt from the employer mandate under the ACA), that allows the use of an HRA to fund individual insurance premiums under certain conditions:
- HRA must be funded solely by the employer
- Contributions are limited to $4,950/year for individual and $10,000/year for family coverage
- Employee must have other minimum essential coverage to receive HRA contributions tax-free
- HRA must be provided on same terms to all eligible employees (limited exceptions)
- Employer cannot offer another group health plan
- Employer must provide 90 days advance notice, And
- Benefit amount must be reported on the W-2
Uncertainties about the future of the nation’s health care system, notably the stabilization of the individual insurance market, remain with the recent release of The American Health Care Act by House Republicans on March 6, 2017. Yet we can consider potential repercussions of the Cures Act with the information we have today. We could see an adverse selection effect if employers with unhealthy, older populations choose to drop the group plan in favor of the HRA, thus further destabilizing the individual market. In the short-term HRA contributions may also interfere with subsidy eligibility in the Marketplace, potentially raising the cost of coverage for employees enrolled in an individual policy. However, we expect to see the repeal and replace strategy evolve as the debate on the proposed legislation continues. As it does, we will provide you with updates to help you better understand how you and your employees may be impacted.
At TAH Benefits, our goal is to be your primary resource for health care reform information. We appreciate your business, and welcome your questions and feedback.