Issues Impacting Small Business Funding

April 09, 2017

New small-business health reimbursement rules provide a great opportunity to employers with fewer than 50 employees, who do not or are unable to offer group health insurance, to assist employees with rising medical costs.

By Suzanne Beall

In a major victory for U.S. small businesses, former President Obama signed the 21st Century Cures Act into law on Dec. 13, 2016. Lawmakers included an important provision in the comprehensive health care package which allows small employers to offer pre-tax dollars to insured employees to help pay premiums and other
medical expenses.

Formally called “stand-alone health reimbursement arrangements,” these pre-tax arrangements were popular among micro-businesses prior to their elimination by the Internal Revenue Service in 2013.

Although the Affordable Care Act did not directly address HRAs by name, the IRS eliminated the benefits, determining that HRAs were defined as “group health plans” and therefore subject to ACA’s requirements, such as preventative care rules. In July 2015, the IRS began imposing a $100 per day, per employee penalty on any employer who offered this medical assistance to its employees.

The International Franchise Association, along with like-minded business organizations, advocated for the return of HRAs for small businesses — those employers who are not required to offer group health plans under ACA. Through this advocacy effort, the 21st Century Cures Act restored HRAs for small employers and also offered penalty relief for any employer offering HRAs prior to Dec. 31, 2016.

Small-business HRAs provide a great opportunity to those employers with less than 50 employees who do not, or are unable to, offer group health insurance, but who want to assist their employees with rising medical costs. Additional guidance is expected as the new administration makes other reforms to the health insurance market. Below is a summary of the new HRA rules for 2017.

Summary

Employers will not be penalized for offering stand-alone HRAs prior to Dec. 31, 2016.
Only small employers with fewer than 50 full-time-equivalent employees, and who do not currently offer a group health plan to any of their employees, may offer stand-alone HRAs.
HRAs reimburse the medical expenses of employees who have obtained minimum essential coverage. If an employee doesn’t have minimum coverage, any reimbursement to cover health expenses could be taxable.
Reimbursement is limited to $4,950 for an individual employee or $10,000 for an employee and their family.
An employer offering a reimbursement arrangement must provide notice not later than 90 days before a year in which it will fund the plan. An employer who doesn’t provide notice could be subject to a fine equal to $50 per employee, per incident, which would be capped at $2,500 per calendar year.
The employer must provide the benefit information on an employee’s W-2 form. Employees must provide this information to a health exchange if they purchase insurance.

Suzanne Beall is Assistant Vice President of Government Relations & Public Policy for the International Franchise Association.