Holiday Present for Small Employers – HRAs Can Be Used
When adopted, the Patient Protection and Affordable Care Act (ACA) generally provided that group health plans had to satisfy certain market reforms, including a prohibition on annual limits and a requirement to offer preventive services with no cost sharing. When interpreting this rule, the IRS and DOL effectively closed the door on many common arrangements, particularly for smaller or emerging employers. One such arrangement was the reimbursement of non-employer sponsored coverage, also known as an employer payment plan arrangement.
In effect, the government indicated that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored health insurance (directly or indirectly), payments may be excluded from the employee’s gross income, but this arrangement will constitute a group health plan. Accordingly, the arrangement is subject to the market reform provisions of the ACA applicable to group health plans (i.e., no annual limit) and inherently violates the rules because it does not contain all the requisite elements, namely no annual limits (since the benefits are inherently limited to the reimbursed amount), and there is no preventive services offering.
The same analysis applied to close the door on stand-alone health reimbursement arrangements (HRAs), with the exception of retiree HRAs. While HRAs that are “integrated with” other coverage that meets the market reforms has been a saving grace for HRAs, the government denied attempts to have “integration” of HRAs with individual market coverage or with individual policies provided under an employer payment plan.
In a somewhat shocking development in 2013, the government further stated that the analysis applied regardless of whether the employer treats the money as pre-tax or post-tax to the employee.
The penalty for noncompliance is steep (generally $100 per day for each violation), so many employers were forced to make difficult decisions, including abandonment of historical practices. The government’s only proffered “solution” was an increase in taxable wages that was not tied to or contingent on obtaining health insurance. The lack of control around this type of increase in wages was simply unpalatable for many employers.
Apparently responding to the extreme criticism, the 21st Century Cures Act, which was recently signed into law by President Obama, attempts a solution for certain eligible small employers with less than 50 full-time employees. Effective January 1, 2017, these employers will be allowed to offer a new, special HRA arrangement, called a qualified small employer health reimbursement arrangement (QSEHRA).
In order to qualify as a QSEHRA, the arrangement must:
Be provided on the same terms to all eligible employees of the eligible employer;
Be funded solely by an eligible employer (i.e., no salary reduction contributions);
Mandate provision of “proof of coverage” before the payment or reimbursement of benefits;
Limit the amount of payments and reimbursements for any year to no more than $4,950 ($10,000 in the case of an arrangement that covers family members of the employee); and
No later than 90 days before the beginning of a year in which the arrangement will be adopted, issue a specific written notice to all eligible employees.
A few notes:
The limit set forth in prong (4.) above will be adjusted for inflation.
An arrangement will not fail to be treated as provided on the same terms to each eligible employee merely because benefit amounts are varied based on the price of an insurance policy in the relevant individual health insurance market, which may be based on the age of the employee and eligible family members and/or the number of family members covered.
Employers looking to adopt a QSEHRA should obtain assistance to design the program in compliance with the new rules and timely draft and circulate the required notice.