21st Century Cures Act Makes It Easier for Small Businesses to Offer HRAs – with No Excise Tax

Congress has delivered a last-minute present to small business owners this holiday season in the form of the 21st Century Cures Act.

This law, which got wide bipartisan support from both houses of Congress, gives small business owners a way to help pay for their employees’ health insurance without having to sign up for and offer a group plan.

Under the 21st Century Cures Act, employers who don’t currently offer a group health plan and who have fewer than 50 full-time and full-time equivalent employees can reimburse employees for health insurance premiums beginning January 1, 2017. The act goes a step further and waives any excise taxes that these employers would have incurred previously if they had such a plan in place.

For small businesses that would like their employees to have health insurance but don’t want to sign up for a group health plan, this arrangement could be the answer. Previously, the Internal Revenue Service (“IRS”) and the Department of Labor (“DOL”) ruled that health reimbursement arrangements (“HRAs”) violated some provisions in the ACA. Employers with these kinds of arrangements faced having to pay an excise tax of $100 per day per employee covered under the arrangement.

Now the law is clear that small employers can reimburse employees for their purchase of health insurance, as long as the reimbursement arrangements are provided on the same terms to all eligible employees.

How Do the New Rules Work?

First, an employer has to meet two requirements to offer a qualified small employer health reimbursement arrangement (QSEHRA):

• The employer isn’t subject to the employer mandate under the ACA (because they have fewer than 50 full-time employees).
• The employer doesn’t already offer a group health plan to employees.

Once they’ve established eligibility, employers have to follow these rules:

• Employers must offer the same QSEHRA to all eligible employees (generally all full-time, non-seasonal employees who are over age 25 and have been employed for at least 90 days).
• 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.
• Reimbursement cannot exceed $4,950 for individuals and $10,000 for families annually. These dollar limits are pro-rated on a monthly basis for individuals who are covered for less than a 12-month period. An employee receiving these reimbursements may find that the premium tax credit for health insurance purchased on the exchange is reduced.
• Employers must notify employees to tell them the amount of the health reimbursement benefit.
• Employees must be notified that if their health insurance coverage doesn’t provide minimum essential coverage, the employee may be subject to an excise tax, and reimbursements under the arrangement may be taxable.
• Employee notices must be given no later than 90 days before the beginning of the year or when the employee is first eligible to participate in the arrangement. Notice for 2017 reimbursements must be provided no later than March 13, 2017.

The decision small businesses face now is which will be better: to continue their current insurance arrangement or convert to a reimbursement arrangement? In our experience, a group insurance arrangement is usually more cost effective. However, if that’s a commitment or a cost you don’t want or can no longer incur, an HRA could be a good choice.