New Law Creates Stand-Alone HRAs for Small Employers

A lame-duck Congress has passed the 21^st Century Cures Act, which was promptly signed into law by President Obama on December 13. The new law includes a slew of provisions for funding medical research and related reforms. Notably, for small business clients, this legislation also creates a new opportunity to use Health Reimbursement Arrangements (HRAs) without triggering penalties under the Affordable Care Act (ACA), the heath care law known informally as Obamacare.

In brief, an HRA is a special type of account used for health care expenses, often offered in conjunction with a high-deductible health insurance plan. Unlike flexible spending accounts (FSAs), which are much more prevalent, HRAs are funded only through employer contributions. The contributions aren’t subject to either income or employment taxes and funds that are used for qualified medical expenses are exempt from tax. This tax exemption extends to co-payments, deductibles and co-insurance.

The ACA requires employers with at least 50 full-time or full-time equivalent employees (FTEs) to provide at least minimal essential health insurance to employees or face stiff penalties. However, under the ACA, HRAs have been treated as “group health plans,” which are subject to restrictions involving preventative services and annual or lifetime dollar caps. In effect, these rules eliminated stand-alone HRAs for small businesses.

Now the new law authorizes the use of stand-alone HRAs if the following requirements are met:

The plan is maintained by an eligible employer. An eligible employer employs fewer than 50 employees and does not offer a group health plan to any of its employees.

The plan is funded solely by employer contributions, In other words, salary reduction contributions aren’t allowed.

HRAs are available to all eligible employees on the same terms. But note that certain workers may be excluded, such as employees with less than 90 days of service and part-time and seasonal employees. Also, reimbursements may vary in different geographic areas (based on the age of the employee and any covered family members) and the number of family members covered under the HRA.

The maximum annual employer contribution is $4,950 per year for an HRA covering only the employee and $10,000 for an HRA covering the family. These amounts will be indexed for inflation, beginning in 2017.

The plan must provide payment or reimbursement for medical care expenses, including premiums for individual health insurance. Employees must provide documentation for the amounts paid.

The new law also coordinates these new rules for HRAs with other aspects of the ACA. For instance, it provides that employees (and their spouses and dependents) aren’t eligible for a premium tax credit for buying health insurance through an exchange for any month in which they are provided a HRA with affordable coverage.

Employers are required to give employees written notice to all eligible employees at least 90 days before the beginning of the plan year (or the date a new-hire becomes eligible. The notice must provide notification of the amount available, the penalties for failing to meet the individual health insurance under the ACA and the tax consequences of using funds for nonqualified expenses.

Some of your small business clients are likely to be interested in this new brand of HRA. Be prepared to handle their inquiries.