The Rebirth of Stand-Alone Health Reimbursement Arrangements for Small Employers

ERISA and Employee Benefits Update

The Rebirth of Stand-Alone Health Reimbursement Arrangements for Small Employers

The once popular Health Reimbursement Arrangements (“HRAs”) were recently on life support until President Obama signed the 21st Century Cures Act (“Act”) on December 13, 2016, which Congress approved with bipartisan support in a lame-duck session. HRAs allow employers to reimburse employees for health care costs (including health insurance premiums) within specified limits. This benefit was excluded from employees’ taxable income and was tax-deductible to the employer—a popular win-win situation for employers and employees. 

For many years, HRAs operated completely separate from any group health plan and an employer who did not otherwise offer a group health insurance plan could still provide its employees some tax-advantaged assistance with health care costs. After passage of the ACA in 2009, however, the government determined that HRAs were group health plans for purposes of the ACA. This meant that employers, including small employers under the ACA (fewer than 50 employees who were not Applicable Large Employers (“ALEs”)) could no longer offer stand-alone HRAs without complying with the full extent of the ACA. HRAs became subject to all ACA regulations including the prohibition on annual limits and the requirement to provide preventative services without cost sharing. Because small employers were often unable to provide an ACA-compliant group health plan, those employers could no longer offer HRAs and avoid ACA penalties. This resulted in less employer assistance for health care costs to employees of small employers, in contravention of the purpose of the ACA—a losing proposition for all involved.

The recent Act amended the definition of “group health plan” under the ACA to exclude Qualified Small Employer Health Reimbursement Arrangements (“QSEHRAs”), which again allows small employers (non-ALEs) to maintain stand-alone HRAs. While the Act revived HRAs from their death bed, there are still important considerations that employers and employees must follow.

• QSEHRAs are funded exclusively with employer tax-deductible contributions that employees can use to pay qualified health expenses, including individual insurance premiums. 
• Employees cannot contribute to QSEHRAs and must carry minimum essential coverage or the employer HRA contributions will be considered taxable income to the employee. 
• Employers that offer QSEHRAs must offer them to all full-time employees (at least 30 hours per week per the ACA) who have completed at least 90 days of service, are at least 25 years old, and are not covered under a collective bargaining agreement providing health benefits. Seasonal employees may be excluded.
• The annual QSEHRA limits for 2017 are $4,950 for single coverage and $10,000 for family coverage, prorated for coverage of less than a full year and subject to annual adjustment for inflation. 
• Employers must generally contribute the same amount for all employees, but some variance relating to the price of an insurance policy in the relevant individual health insurance market (due to age or number of family members, for example) is permissible.
• Employers must notify employees at least 90 days prior to the start of the plan year or within 90 days of the date that new employees become eligible. Failure to provide the notice subjects employers to a $50 per day penalty for each affected employee. 
• The Act provides a reprieve to employers who offered stand-alone HRAs after the ACA disallowed them by exempting such employers from the potential penalties of up to $100/day for each affected employee, by extending relief from such penalties for plan years beginning on or before December 31, 2016. 
   

This change in the law to permit stand-alone HRAs may be great news for small employers who are not large enough to set up a group health plan. If an HRA qualifies and complies with the QSEHRA requirements, it can provide the stand-alone tax-advantaged assistance to employees for health care costs that existed prior to the ACA. Although it was made available for plan years beginning after December 31, 2016, this good news came too late for most employers to implement it for the 2017 plan year. However, it should be useful for subsequent years by providing increased flexibility for qualifying employers who want to provide health benefits to their employees without having to establish an expensive companion health plan. Not everyone agrees this is a great idea. Small employers who might otherwise offer group health coverage could now decide to only offer an HRA—reducing employees’ health benefits. However, for many small employers who could not provide ACA-complaint health plans, this change will allow greater flexibility to help employees with rising health care costs.

Update (March 1, 2017): The IRS recently issued transition relief for the requirement that an employer issue a notice to affected employees regarding QSEHRAs, making it easier for an employer to start a stand-alone HRA during the current plan year. As noted above, the Act requires employers to notify employees at least 90 days prior to the start of the plan year or within 90 days of the date that new employees become eligible. The failure to do so subjects employers to a $50 per day penalty for each affected employee. Due to the difficulty some eligible employers may have in complying with the written notice requirements absent additional guidance concerning the contents of the notice, the IRS is not enforcing the notice requirement or its penalties until at least 90 days after it issues additional guidance for the content of the notice. See IRS Notice 2017-20.