Should Your Small Business Consider a Health Reimbursement Arrangement?
Qualifying small businesses can use health reimbursement arrangements (HRAs) without triggering penalties under the Patient Protection and Affordable Care Act (ACA). A provision added by the 21st Century Cures Act (the Act) excludes qualified small employer HRAs from the ACA’s definition of group health plan.
HRAs are employer-funded plans that use pre-tax dollars to reimburse employees for out-of-pocket medical expenses and individual health insurance premiums. Previously, the IRS had ruled that HRAs are group health plans that fail to comply with the ACA’s market reforms and, therefore, are subject to a penalty tax of $100 per day per affected participant.
The Act permits small employers (those with fewer than 50 full-time or full-time-equivalent employees) to offer HRAs to their employees penalty-free, provided the following requirements are met:
- The HRA must be funded solely by the employer, without any salary reduction contributions.
- The employer must not offer a group health plan to any of its employees.
- Benefits must be provided on the same terms to all eligible employees (although they may vary based on certain age and family-size variations in insurance prices).
- Benefits can only be used to pay medical care expenses (as defined by the ACA) incurred by eligible employees or their family members.
- Payments and reimbursements cannot exceed $4,950 per year ($10,000 for family coverage).
Several other requirements apply, including various reporting and employee notice provisions. Qualifying employers who establish HRAs must offer them to all full-time employees who are 25 or older and have completed 90 days of service. Employers may exclude part-time and seasonal workers.
Under proposed rules that would take effect in 2020, new types of arrangements would be allowed, including HRAs that can be integrated with individual health coverage.