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21st Century Cures Act Reinstates HRA Benefit for Small Business

President Obama signed into law the 21st Century Cures Act (the Act) on December 13th which allows small employers to provide Health Reimbursement Arrangements (HRAs) for their employees without facing penalties for failing to satisfy certain Affordable Care Act (ACA) requirements. Furthermore, the Act retroactively grants penalty relief for plan years beginning on or before December 31, 2016. HRAs are essentially employer-funded health stipends that could be used by employees for qualified expenses, such as health insurance premiums or out-of-pocket expenses.

HRAs were effectively ended by regulators in 2013, but are now, with the president’s signature, available to entrepreneurs once again.

Why this is Great News:

For employers, company contributions to an HRA plan are 100 percent tax deductible and the expenses of establishing an HRA plan are typically a lot less than a low-deductible health care plan. For employees, the medical care reimbursements under this benefits are tax-free. Expenses that constitute “medical care” include health insurance premiums, incurred by the employee or one of the employee’s family members. Finally, the plan may allow any unused amounts in a year to be carried over to the next year.

Basic Rules:

Starting in 2017, qualified small employer HRAs are not treated as a group health plan for income tax purposes.  Thus, they will not face the excise tax penalties levied on group health plans that don’t meet the ACA requirements.

Qualified small employer HRAs must satisfy the following requirements:

  • It must be maintained by an employer who has less than 50 employees and does NOT offer a group health plan to any of its employees.
  • It must be provided on the same terms to all eligible employees. An eligible employee is any employee, except those with fewer than 90 days of service, part-time or seasonal workers, employees under age 25, those covered by collective bargaining, and certain nonresident aliens.
  • It must be funded solely by the employer with no salary reduction.
  • It must provide for the payment, or reimbursement, of an eligible expense for medical care incurred by the employee or the employee’s family members.
  • The amount of payments and reimbursements are capped at $4,950 for individuals ($10,000 for arrangements that also provide for payments for family members). Dollar limits are prorated for employees who are covered for less than the entire year.
  • Employees can only be reimbursed once they’ve provided proof of payment for and coverage of their health insurance or proof of payment for medical care expenses for themselves and/or family members.

Required Written Notice:

Employers funding a qualified HRA for any year must, not later than 90 days before the beginning of such year, provide a written notice to each eligible employee which includes (i) a statement of the amount of the employee’s permitted benefit under the arrangement for the year; (ii) a statement that the eligible employee should provide the information described in clause (i) to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; (iii) a statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax under the individual mandate for such month, and reimbursements under the arrangement may be includible in gross income. The Act provides transitional relief, however, for failure to provide this written notice as long as the notice is provided within 90 days from the date the President signed the bill.

Failure to provide the required notice, unless such failure is shown to be due to reasonable cause, will subject the employer to a $50 per-employee, per-incident-of-failure penalty, up to a $2,500 calendar year maximum for all such failures.

Look for further guidance on how employers will also have to report the total amount of this permitted benefit on the employee’s Form W-2 (beginning in 2017).

Please contact your Wegner CPAs professional if you have any questions regarding this law change.

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