Medical Insurance Premium Reimbursement Arrangements Are Back in Play (For Small Employers)
In the days before the Affordable Care Act (the “ACA”), an employer that did not offer a group medical insurance policy to its employees could instead adopt a health reimbursement arrangement (“HRA”). Through the HRA, the employer could reimburse employees on a tax-free basis for all or a portion of the cost of the premiums for an insurance policy purchased on the open market. The ACA disallowed this practice, effective as of January 1, 2014.
Prior to closing up shop for the year, Congress passed the “21st Century Cures Act,” which consists of a myriad of health care measures. Among the provisions of the legislation is one that allows eligible small employers to reimburse employees through an HRA for qualified medical expenses, including medical insurance premiums. The reimbursements are excluded from the employee’s income, provided that the employee is covered under a medical insurance policy that provides minimum essential coverage (such as an individual insurance policy or a policy purchased on an Insurance Exchange).
The legislation was signed into law on December 13, 2016, and is effective for plan years beginning on or after January 1, 2017.
As a result of the legislation, small employers will be able to sponsor medical insurance premium reimbursement programs, just like in the old days.
The key features of the new HRA rules are outlined below.
- An employer can establish the HRA for a year only if it:
- Had fewer than 50 full-time equivalent employees in the preceding year (i.e., it Is not an “applicable large employer” under the ACA for that year); and
- Does not offer a group health plan to any of its employees.
- The maximum amount that may be reimbursed during a year is $4,950 for an individual employee, and $10,000 in the case of an HRA that also provides for reimbursements for family members. The annual limit is prorated for an individual who is not covered for the entire year. The limit will be adjusted for inflation.
- The HRA could provide for the reimbursement of any type of a qualified medical expense. However, the law is designed to simply reimburse employees for the cost of their medical insurance premiums.
- Reimbursements must be made available on the same terms to all eligible employees. For this purpose, the following employees can be excluded:
- Employees who have not completed 90 days of service;
- Employees who have not attained age 25;
- Part-time and seasonal employees; and
- Union employees.
- Amounts reimbursed under the HRA will reduce dollar-by-dollar any premium tax credit otherwise available for an insurance policy purchased on the Insurance Exchange.
- A notice advising of the amount of the reimbursements available under the HRA, and other described information, must be provided to eligible employees prior to the beginning of each year. However, the first notice will not be required earlier than 90 days after the date of the enactment of the new law (which is March 13, 2017).
- The amount of the reimbursements made available to an employee under the HRA for a year will need to be reported on an employee’s W-2.
- The HRA is exempt from the COBRA continuation coverage rules, and from the ACA generally.
- The HRA will constitute an employee benefit plan for purposes of ERISA. Therefore, a plan document and summary plan description will be required.
Small employers having cost restraints that restrict their ability to provide group medical insurance to their employees can now again through an HRA subsidize their employees for the premiums paid for the purchase of medical insurance on the open market. The reimbursements will be tax-free to the employees, and deductible by the employer. However, the tax-free treatment to an employee will need to be weighed against the offset of the premium tax credit that may be available.
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For further information or questions regarding the new HRA programs for small employers, please contact the Schwabe attorney with whom you work or Wally Miller at (541) 686-3299 or firstname.lastname@example.org.