Health Reimbursement Accounts for Small Employers

Health Reimbursement Accounts (HRA’s) are back after the signing of the 21^st Century Cure Act, effective January 1, 2017. There are new rules (of course!) that come right along with them for 2017 (as well as some transitional relief for the remainder of 2016).

Just a bit of background: health reimbursement accounts can be setup for employers to reimburse employees for medical and/or individual/family health insurance expenses. Reimbursements are tax free to the employee, deductible by the employer, and also not subject to payroll taxes. In the recent past, such plans that did not coordinate with a group health insurance plan were subject to a $100 per employee, per day penalty. That penalty is now gone, but new rules apply to these arrangements.

Here’s a short list that we’ve compiled to help guide you in the right direction:

• Employers eligible to offer small employer HRA’s are those that:
  • Have more than 1 employee and less than 50 full time equivalent employees ( for example, an employer with 110 half time employees would have 55 full time equivalent employees, and therefore not qualify)
  • Do not offer group health insurance to any employees (different rules apply to those that offer group health insurance)
• The plan must:
  • Be funded by the employer. Employees can’t contribute.
  • Provide for the payment or reimbursement of medical expenses of the employee (and employee’s family if so chosen) AFTER the employee provides proof of minimum essential health coverage, and proof of the expense.
  • Be offered to eligible employees in a timely and proper fashion.
• The HRA Plan must be provided on the same terms to all eligible employees.
  • Employees may be excluded from eligibility if they
    • Are younger than 25
    • Are part time (less than 30 hours per week)
    • Are subject to collective bargaining (aka are a union member)
    • Are a seasonal employee
    • Haven’t completed the first 90 days of service for the employer
    • Are a certain type of nonresident alien
  • Plans that offer different reimbursement amounts based upon variations in the price of an insurance policy will still qualify (i.e. age, number of family members, etc. can be a factor in the reimbursement amount)
• The HRA Plan must be funded solely by the employer. Employees can’t contribute to their own HRA’s.
• Maximum plan payment or reimbursements are limited:
  • Employee only coverage maximum is $4,950 per year.
  • Employee & employee’s family coverage maximum is $10,000 per year.
  • Partial year coverage is prorated to the maximums by month
• If the employee is claiming a Premium Tax Credit (a credit for health insurance purchased thru Obamacare), the tax credit will be reduced by the amount of the HRA reimbursement.
• Total amount of HRA’s paid to on or the behalf of the employee must be reported in the employee’s W-2, but will be excluded from the employee’s taxable income.

As is the usual story with HRA’s (and Obamacare in its entirety), we expect changes in the future! The good news is that expected changes may lighten the restrictions. As always, we’ll keep you posted!