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21st Century Cures Act Provides New Healthcare Option for Small Employers
Attorney Amanda E. Prutzman
On January 1, 2017, a new law took effect which allows small employers to provide their employees extra compensation to purchase their own health insurance without penalties. President Obama signed the new law, called the 21st Century Cures Act, on December 13, 2016.
Previously, small employers who did not provide group health insurance faced penalties under the Affordable Care Act ("ACA") if they provided their employees with additional monies to assist with individual health insurance premiums. Now, small employers may provide Health Reimbursement Arrangements ("HRAs") (also known as Qualified Small Employer Health Reimbursement Arrangements ("QSEHRAS")) to their employees without facing penalties.
This change provides small employers greater flexibility in the benefits they offer their employees. Eligible employers can now fund HRAs to assist their employees in purchasing individual health insurance plans of their choice rather than a one-size-fits-all group health plan. The legislation is significant realization for small businesses that are looking for a cost-effective way to help their employees obtain health coverage and stay competitive with businesses that do offer group health plans.
What are HRAs?
HRAs are arrangements under which the employer contributes funds up to a certain amount per year, which can be used to reimburse employees' medical expenses including insurance premiums. Unused amounts may be used in future years. Funds the employer contributes are excluded from payroll tax. And, the funds the employee receives are excluded from the employee's income for tax purposes.
Previously, before the 21st Century Cures Act, HRAs were considered to be group health plans which were regulated by the ACA group market reform requirements and penalties applied if employers offered them. Now, the new law statutorily excludes HRAs from the definition of group health plan and they are, therefore, not subject to the ACA's coverage requirements for employer provided plans. This statutory exclusion is effective for HRA plan years beginning after December 31, 2016.
Who is eligible to provide HRAs?
Small employers with fewer than 50 employees (based upon last year's average and excluding seasonal employees) that do not sponsor a group health plan are eligible to provide HRAs to their employees. Employers with 50 or more employees cannot offer an HRA and may fall under the ACA's requirement to provide group health coverage. Eligible employers can fund HRAs to pay for non-group plan premiums. Their employees can use the funds to purchase their own health insurance plans, including ones on healthcare marketplaces and exchanges under the ACA.
What are the requirements if we provide an HRA?
There are several requirements for small employers who choose to provide an HRA to their employees:
- Employers must offer HRAs to all Full Time Equivalent (FTE) employees except: those employed less than 90 days, those under 25 years old, seasonal employees, those covered by a collective bargaining agreement, and part time employees.
- The maximum reimbursement employers can provide is $4,950 for single coverage and $10,000 for family coverage per year. These amounts must be pro-rated for employees that begin employment mid-year. These amounts are set to be adjusted annually for inflation.
- Employers must adopt a policy that treats all employees equally.Contributions to HRAs should be the same for all employees, but, contributions can vary based upon price of the individual health insurance market.
- For example, an employer is compliant if they adopt a policy stating they provide 50% of the premium for all employees. Under this policy, an employee with family coverage or an older employee may receive more than a younger employee with single coverage. An employer is not compliant if they adopt a policy wherein they provide 100% of the premiums for managers and 50% of the premiums for all other employees. This would be an impermissibly unequal policy.
- HRAs must be funded solely by the employer, with no salary contributions or reductions from the employee.
- Employers must provide HRA notices to employees or face penalties.
- No later than 90 days before the beginning of an HRA plan year, or the date an employee first becomes eligible for the HRA, employers must provide a written notice to each eligible employee which includes: (1) the amount of the employee's permitted benefit under the HRA for the year; (2) a statement that the eligible employee should provide their HRA benefit amount to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and (3) a statement that if the employee does not have minimum essential coverage required by the ACA for any month, the employee may be subject to tax under the individual mandate for that month and HRA reimbursements may be taxed as gross income.
- If an employer does not provide the required notice, the employer may be subject to a $50 per-employee, per-incident penalty, up to a $2,500 maximum.
- Employers must report the value of HRA benefits on their employees' W-2 Forms beginning in 2017 (i.e. in January 2018 for the year 2017).
What are the Considerations for my Employees?
There are a few considerations for employees who receive HRA benefits as well.
- Employees can use HRA funds to pay for their medical expenses as well as receive reimbursement for their health insurance premiums, but they must provide proof of coverage.
- Employees are not taxed on the funds they receive unless they do not have the minimum coverage required by the ACA. If that occurs, reimbursements the employee receives for any month they do not have required coverage are taxed as income to the employee for that month.
- Employees may not be eligible for health insurance premium tax credits under the ACA if they receive HRA contributions. Eligibility is dependent upon the facts and circumstances of each employee and their relevant insurance market. For example, if the monthly premium for individual coverage for the second-lowest cost silver (70 percent actuarial value) plan in their insurance market is less than half of 9.5 percent of the employee's household income minus the HRA premium contribution. But, if coverage is not affordable under this formula, the employee may qualify for a premium tax credit which will be reduced by the amount of any HRA contribution.
What does the Future Hold for Eligible Small Employers?
Although the 21st Century Cures Act took effect too late for most employers to participate by providing an HRA for the 2017 calendar year, it provides a significant benefit for small businesses to remain competitive by providing benefits that attract and retain talent in the future. Employers who do not provide group health plans may still offer significant benefits to their employees by offering an HRA.
The new law may also encourage small and mid-sized companies who currently offer group health plans to replace them with health insurance premium reimbursements through HRAs, instead. This may prove to be a trend in the future especially if group health insurance premiums continue to increase and if small businesses tire of the administrative burden of providing such plans to a small work force.
If you have any questions about the new law and whether your business might benefit from HRAs, please contact Attorney Amanda E. Prutzman at Eckberg Lammers, P.C. via email at aprutzman@eckerglammers.com
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