Section 18001 of the 21st Century Cures Act (Small Business HRAs)

EXCEPTION FROM GROUP HEALTH PLAN REQUIREMENTS FOR QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENTS

Section 18001. (Annotated)
(a) Amendments To The Internal Revenue Code Of 1986 And The Patient Protection And Affordable Care Act.—

(1) IN GENERAL.—Section 9831 (excepted benefits) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

“(d) Exception For Qualified Small Employer Health Reimbursement Arrangements.—

“(1) IN GENERAL.—For purposes of this title (except as provided in section 4980I(f)(4) and notwithstanding any other provision of this title), the term ‘group health plan’ shall not include any qualified small employer health reimbursement arrangement.

“(2) QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENT.—For purposes of this subsection—

“(A) IN GENERAL.—The term ‘qualified small employer health reimbursement arrangement’ means an arrangement which—

“(i) is described in subparagraph (B), and

“(ii) is provided on the same terms to all eligible employees of the eligible employer.

“(B) ARRANGEMENT DESCRIBED.—An arrangement is described in this subparagraph if—

“(i) such arrangement is funded solely by an eligible employer and no salary reduction contributions may be made under such arrangement,

“(ii) such arrangement provides, after the employee provides proof of coverage, for the payment of, or reimbursement of, an eligible employee for expenses for medical care (as defined in section 213(d)) incurred by the eligible employee or the eligible employee’s family members (as determined under the terms of the arrangement), and

“(iii) the amount of payments and reimbursements described in clause (ii) for any year do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee).

“(C) CERTAIN VARIATION PERMITTED.—For purposes of subparagraph (A)(ii), an arrangement shall not fail to be treated as provided on the same terms to each eligible employee merely because the employee’s permitted benefit under such arrangement varies in accordance with the variation in the price of an insurance policy in the relevant individual health insurance market based on—

“(i) the age of the eligible employee (and, in the case of an arrangement which covers medical expenses of the eligible employee’s family members, the age of such family members), or

“(ii) the number of family members of the eligible employee the medical expenses of which are covered under such arrangement.

The variation permitted under the preceding sentence shall be determined by reference to the same insurance policy with respect to all eligible employees.

“(D) RULES RELATING TO MAXIMUM DOLLAR LIMITATION.—

“(i) AMOUNT PRORATED IN CERTAIN CASES.—In the case of an individual who is not covered by an arrangement for the entire year, the limitation under subparagraph (B)(iii) for such year shall be an amount which bears the same ratio to the amount which would (but for this clause) be in effect for such individual for such year under subparagraph (B)(iii) as the number of months for which such individual is covered by the arrangement for such year bears to 12.

“(ii) INFLATION ADJUSTMENT.—In the case of any year beginning after 2016, each of the dollar amounts in subparagraph (B)(iii) shall be increased by an amount equal to—

“(I) such dollar amount, multiplied by

“(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2015’ for ‘calendar year 1992’ in subparagraph (B) thereof.

If any dollar amount increased under the preceding sentence is not a multiple of $50, such dollar amount shall be rounded to the next lowest multiple of $50.

“(3) OTHER DEFINITIONS.—For purposes of this subsection—

“(A) ELIGIBLE EMPLOYEE.—The term ‘eligible employee’ means any employee of an eligible employer, except that the terms of the arrangement may exclude from consideration employees described in any clause of section 105(h)(3)(B) (applied by substituting ‘90 days’ for ‘3 years’ in clause (i) thereof).

“(B) ELIGIBLE EMPLOYER.—The term ‘eligible employer’ means an employer that—

“(i) is not an applicable large employer as defined in section 4980H(c)(2), and

“(ii) does not offer a group health plan to any of its employees.

“(C) PERMITTED BENEFIT.—The term ‘permitted benefit’ means, with respect to any eligible employee, the maximum dollar amount of payments and reimbursements which may be made under the terms of the qualified small employer health reimbursement arrangement for the year with respect to such employee.

“(4) NOTICE.— (amend plan and notify employees)

“(A) IN GENERAL.—An employer funding a qualified small employer health reimbursement arrangement for any year shall, not later than 90 days before the beginning of such year (or, in the case of an employee who is not eligible to participate in the arrangement as of the beginning of such year, the date on which such employee is first so eligible), provide a written notice to each eligible employee which includes the information described in subparagraph (B).

“(B) CONTENTS OF NOTICE.—The notice required under subparagraph (A) shall include each of the following:

“(i) A statement of the amount which would be such eligible employee’s permitted benefit under the arrangement for the year.

“(ii) A statement that the eligible employee should provide the information described in clause (i) to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit.

“(iii) A statement that if the employee is not covered under minimum essential coverage for any month the employee may be subject to tax under section 5000A for such month and reimbursements under the arrangement may be includible in gross income.”.

(2) LIMITATION ON EXCLUSION FROM GROSS INCOME.—Section 106 of such Code is amended by adding at the end the following:

 

“(g) Qualified Small Employer Health Reimbursement Arrangement.—For purposes of this section and section 105, payments or reimbursements from a qualified small employer health reimbursement arrangement (as defined in section 9831(d)) of an individual for medical care (as defined in section 213(d)) shall not be treated as paid or reimbursed under employer-provided coverage for medical expenses under an accident or health plan if for the month in which such medical care is provided the individual does not have minimum essential coverage (within the meaning of section 5000A(f)).”.

(3) COORDINATION WITH HEALTH INSURANCE PREMIUM CREDIT.—Section 36B(c) (Refundable credit for coverage under a qualified health plan) of such Code is amended by adding at the end the following new paragraph:

 

“(4) SPECIAL RULES FOR QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENTS.—

“(A) IN GENERAL.—The term ‘coverage month’ shall not include any month with respect to an employee (or any spouse or dependent of such employee) if for such month the employee is provided a qualified small employer health reimbursement arrangement which constitutes affordable coverage.

“(B) DENIAL OF DOUBLE BENEFIT.—In the case of any employee who is provided a qualified small employer health reimbursement arrangement for any coverage month (determined without regard to subparagraph (A)), the credit otherwise allowable under subsection (a) to the taxpayer for such month shall be reduced (but not below zero) by the amount described in subparagraph (C)(i)(II) for such month.

“(C) AFFORDABLE COVERAGE.—For purposes of subparagraph (A), a qualified small employer health reimbursement arrangement shall be treated as constituting affordable coverage for a month if—

“(i) the excess of—

“(I) the amount that would be paid by the employee as the premium for such month for self-only coverage under the second lowest cost silver plan offered in the relevant individual health insurance market, over

“(II) 1⁄12 of the employee’s permitted benefit (as defined in section 9831(d)(3)(C)) under such arrangement, does not exceed—

“(ii) 1⁄12 of 9.5 percent of the employee’s household income.

“(D) QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENT.—For purposes of this paragraph, the term ‘qualified small employer health reimbursement arrangement’ has the meaning given such term by section 9831(d)(2) (same definition of “qualified small employer health reimbursement arrangement”).

“(E) COVERAGE FOR LESS THAN ENTIRE YEAR.—In the case of an employee who is provided a qualified small employer health reimbursement arrangement for less than an entire year, subparagraph (C)(i)(II) shall be applied by substituting ‘the number of months during the year for which such arrangement was provided’ for ‘12’.

“(F) INDEXING.—In the case of plan years beginning in any calendar year after 2014, the Secretary shall adjust the 9.5 percent amount under subparagraph (C)(ii) in the same manner as the percentages are adjusted under subsection (b)(3)(A)(ii).”.

(4) APPLICATION OF EXCISE TAX ON HIGH COST EMPLOYER-SPONSORED HEALTH COVERAGE.—

(A) IN GENERAL.—Section 4980I(f)(4) of such Code is amended by adding at the end the following: “Section 9831(d)(1) shall not apply for purposes of this section.”.

(B) DETERMINATION OF COST OF COVERAGE.—Section 4980I(d)(2) of such Code is amended by redesignating subparagraph (D) as subparagraph (E) and by inserting after subparagraph (C) the following new subparagraph:

 

“(D) QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENTS.—In the case of applicable employer-sponsored coverage consisting of coverage under any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2)), the cost of coverage shall be equal to the amount described in section 6051(a)(15).”.

(5) ENFORCEMENT OF NOTICE REQUIREMENT.—Section 6652 of such Code is amended by adding at the end the following new subsection:

 

“(o) Failure To Provide Notices With Respect To Qualified Small Employer Health Reimbursement Arrangements.—In the case of each failure to provide a written notice as required by section 9831(d)(4), unless it is shown that such failure is due to reasonable cause and not willful neglect, there shall be paid, on notice and demand of the Secretary and in the same manner as tax, by the person failing to provide such written notice, an amount equal to $50 per employee per incident of failure to provide such notice, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $2,500.”.

(6) REPORTING.—

(A) W–2 REPORTING.—Section 6051(a) of such Code is amended by striking “and” at the end of paragraph (13), by striking the period at the end of paragraph (14) and inserting “, and”, and by inserting after paragraph (14) the following new paragraph:

 

“(15) the total amount of permitted benefit (as defined in section 9831(d)(3)(C)) for the year under a qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2)) with respect to the employee.”.

(B) INFORMATION REQUIRED TO BE PROVIDED BY EXCHANGE SUBSIDY APPLICANTS.—Section 1411(b)(3) of the Patient Protection and Affordable Care Act is amended by redesignating subparagraph (B) as subparagraph (C) and by inserting after subparagraph (A) the following new subparagraph:

 

“(B) CERTAIN INDIVIDUAL HEALTH INSURANCE POLICIES OBTAINED THROUGH SMALL EMPLOYERS.—The amount of the enrollee’s permitted benefit (as defined in section 9831(d)(3)(C) of the Internal Revenue Code of 1986) under a qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of such Code).”.

(7) EFFECTIVE DATES.—

(A) IN GENERAL.—Except as otherwise provided in this paragraph, the amendments made by this subsection shall apply to years beginning after December 31, 2016.

(B) TRANSITION RELIEF.—The relief under Treasury Notice 2015–17 shall be treated as applying to any plan year beginning on or before December 31, 2016.

(C) COORDINATION WITH HEALTH INSURANCE PREMIUM CREDIT.—The amendments made by paragraph (3) shall apply to taxable years beginning after December 31, 2016.

(D) EMPLOYEE NOTICE.—

(i) IN GENERAL.—The amendments made by paragraph (5) shall apply to notices with respect to years beginning after December 31, 2016.

(ii) TRANSITION RELIEF.—For purposes of section 6652(o) of the Internal Revenue Code of 1986 (as added by this Act), a person shall not be treated as failing to provide a written notice as required by section 9831(d)(4) of such Code if such notice is so provided not later than 90 days after the date of the enactment of this Act.

(E) W–2 REPORTING.—The amendments made by paragraph (6)(A) shall apply to calendar years beginning after December 31, 2016.

(F) INFORMATION PROVIDED BY EXCHANGE SUBSIDY APPLICANTS.—

(i) IN GENERAL.—The amendments made by paragraph (6)(B) shall apply to applications for enrollment made after December 31, 2016.

(ii) VERIFICATION.—Verification under section 1411 of the Patient Protection and Affordable Care Act of information provided under section 1411(b)(3)(B) of such Act shall apply with respect to months beginning after October 2016.

(iii) TRANSITIONAL RELIEF.—In the case of an application for enrollment under section 1411(b) of the Patient Protection and Affordable Care Act made before April 1, 2017, the requirement of section 1411(b)(3)(B) of such Act shall be treated as met if the information described therein is provided not later than 30 days after the date on which the applicant receives the notice described in section 9831(d)(4) of the Internal Revenue Code of 1986.

(8) SUBSTANTIATION REQUIREMENTS.—The Secretary of the Treasury (or his designee) may issue substantiation requirements as necessary to carry out this subsection. (Does this affect previous HRA substantiation requirements?)

(b) Amendments To The Employee Retirement Income Security Act Of 1974.—

(1) IN GENERAL.—Section 733(a)(1) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1191b(a)(1)) (definition of “group health plan”) is amended by adding at the end the following: “Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).”.

(2) EXCEPTION FROM CONTINUATION COVERAGE REQUIREMENTS, ETC.—Section 607(1) of such Act (29 U.S.C. 1167(1)) is amended by adding at the end the following: “Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).”.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to plan years beginning after December 31, 2016.

(c) Amendments To The Public Health Service Act.—

(1) IN GENERAL.—Section 2791(a)(1) of the Public Health Service Act (42 U.S.C. 300gg–91(a)(1)) is amended by adding at the end the following: “Except for purposes of part C of title XI of the Social Security Act (42 U.S.C. 1320d et seq.), such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).”.

(2) EXCEPTION FROM CONTINUATION COVERAGE REQUIREMENTS.—Section 2208(1) of the Public Health Service Act (42 U.S.C. 300bb–8(1)) is amended by adding at the end the following: “Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).”.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply to plan years beginning after December 31, 2016.

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20 Rules for Operating a Health Reimbursement Arrangement (HRA)

Update January 30, 2017: No fee Health Reimbursement Arrangements for small businesses are available to qualifying businesses. See Freedom Benefits for business qualification information. A regular fee applies to other businesses. Setup time is 24 to 48 hours once I have the employer information required. Claim administration is typically about $100 per employee per year but varies depending on the accounting and payroll system used by the employer. In some cases where the employer uses QuickBooks Online accounting and a compatible payroll system then the claim administration may also be free.

Updated December 30, 2016 – If your small business reimburses employee health care costs, you need to be aware that tax laws have changed effective July 2015 and again in December 2016 and there may be actions necessary right now to amend your reimbursement arrangement and avoid potentially severe tax liabilities as a result of the Affordable Care Act (ACA). The IRS issued a series of rules and notices from 2013 to 2016 that detail the new tax rules.

HRAs must properly incorporate primary health insurance or risk substantial tax penalty. This following expanded list of 20 items may help small business employers and their tax advisers gain a better understanding of the new excise tax rules and how to avoid them.

Please note that if you are operating a company with one participant in the health plan or where husband and wife are the only health plan participants, many of these 20 items do not apply. Please read the note at the end of the article first.

Affordable Care Act prescription bottle on blue with sethescope and pills.

The Affordable Care Act dramatically changes the tax rules for employers who reimburse employee medical expenses.

 

1. The federal government considers your informal employee health care payment arrangement to be subject to the extensive legal requirements of a “group health plan” (even if you did not intend it so or think of it that way). The legal requirements include exposure under the requirements of the Employee Retirement Income Security Act of 1974 for employee welfare benefit plans.

2. To avoid taxes and legal liabilities, the HRA must either be integrated with an employer-provided ACA-compliant group health insurance plan or must comply with the provisions of  Section 18001 of the 21st Century Cures Act.

3. The HRA must be in writing unless you are reimbursing insurance costs only.

4. Employers who do not offer group health insurance may now reimburse the cost of individual health insurance or out-of-pocket medical expenses.

5. Where an employee is covered by their spouse’s plan, employers may not reimburse the cost of the spousal coverage.

6. The HRA may cover employees who are not covered by the employer’s group insurance plan, including the spouse or dependents who are not on the group health insurance.

7. For purposes of determining whether a violation of ACA market reforms has occurred, it does not matter whether the reimbursements were made on a pre-tax or after tax basis.

8. Taxation of health benefits to the employee is a separate issue from the applicability of excise taxes on the employer. The normal treatment is to exclude the benefit from employee income but the benefit would be taxable compensation in some cases where the employee does not maintain minimum essential coverage. This article does not cover taxation of benefits under an HRA.

9. Employers who give taxable compensation bonuses may make reference to employee health care costs if that is the purpose of the bonus arrangement.

10. The minimum statutory tax penalty for unintentional violation of ACA market reform law not modified by the 21st Century Cures Act is 10% of the amount the employer paid. The maximum amount of penalty is $100 per employee per day of violation, plus (if applicable) wage taxes plus (if applicable) interest and penalties.

11. Stand-alone HRAs may reimburse up to $4,950 for an eligible employee and $10,000 for an employee with family coverage.

12. If an employees is not covered for the entire year, the limitations are prorated.

13. A HRA must be communicated to employees separately from the insurance plan.

14. Employees may not contribute to a HRA. All contributions must be employer paid.

15. HRAs are effective in expanding coverage at a higher overall cost. HRAs are not effective in reducing the overall cost of employee health benefits. In fact HRAs may someday trigger the “Cadillac tax” provisions for rich health benefits in the future because they increase the total health benefits for employees (unless this tax s repealed as expected).

16. Improper reimbursements trigger severe excise penalties under section 4980D of the Internal Revenue Code. This penalty is $100/day excise tax per applicable employee (which is $36,500 per year, per employee). Smaller penalties may apply if the violation was not due to willful neglect. The penalties must be self-reported beginning in 2014 yet many employers may not even realize that they are in violation so the likelihood of interest and late payment penalties further compounds the problem.

17. If the employer is subject to the smaller 10% excise penalty for one year and then still does not correct the HRA plan for 2016, there would likely be a greater likelihood that the higher severe penalty would be assessed for the same repeat violation in the second year.

18. Employers that had a medical reimbursement plan prior to July 1, 2015 and have not updated their plan this year may unknowingly be subject to the excise tax. Apparently there are many small firms that don’t even know about this problem).

19. Employers affected penalties in #16 above should act as quickly as possible to terminate or amend their HRA plan and make appropriate payroll tax adjustments if necessary to avoid additional lateness tax penalties.

20. Excise tax penalties under IRC 4980D are self-reported on IRS Form 8928. The first small business penalty taxes were payable March 16, 2016 by corporate filers on violations occurring from July to December 2015.


 

The good news: For most small businesses, it is easy and inexpensive to get experienced professional help with the setup and documentation of a self-administered HRA. I’ve acted as adviser to help set up or amend these benefits for dozens of small businesses and nonprofit organizations across the U.S. since the 1980s. In many cases the work can be accomplished as a flat fee concierge advisory service. I can provide sample HRA plan documents to qualifying businesses but you may wish to have an attorney review them; I cannot provide legal services.


 

Disclosure and clarification

The advice in this article is simplified for the purpose of clear communication regarding most small businesses. As with most aspects of tax and benefit law, there are special circumstances that may not be addressed in this general information. This article ignores the possibility of uninsured ACA-compliant health plans or grandfathered health plans simply because these are not common.

*Many of these points do not apply to one participant health plans or small C corporations. A husband and wife C corporation might be operated as a two employee company for other purposes but the HRA could be designed as a one person health benefit plan with dependent (the other employee/spouse) coverage. Then, as a one person health plan the HRA would be exempt from classification as an employer-provided health plan as discussed in IRS Notice 2015-17 that clarifies Code § 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. Accordingly, an arrangement covering only a single employee (whether or not a shareholder-employee) generally is not subject to the market reforms whether or not such a reimbursement arrangement otherwise constitutes a group health plan. In the case, the “old rules” apply and the HRA could be operated in the same manner as before ACA. It is still important that the plan documents support the fact pattern presumed in this discussion.

The term “health insurance” in this discussion refers to primary ACA-compliant major medical insurance also known as “minimal essential coverage”.

 

References

26 U.S.C. 4980D Failure to meet certain group health plan requirements

29 CFR 2510.3-1(j) http://www.gpo.gov/fdsys/pkg/CFR-2010-title29-vol9/pdf/CFR-2010-title29-vol9-sec2510-3-1.pdf

IRS Notice 2013-54 http://www.irs.gov/pub/irs-drop/n-13-54.pdf

IRS Notice 2015-87 https://www.irs.gov/pub/irs-drop/n-15-87.pdf

IRS Notice 2016-4 https://www.irs.gov/pub/irs-drop/n-16-04.pdf

Application of Affordable Care Act Provisions to Certain Healthcare Arrangements https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf

US Department of Labor, FAQs about Affordable Care Act Implementation (Part XXII) http://www.dol.gov/ebsa/faqs/faq-aca22.html

Why ACA Employer Mandate Rules Need More Guidance” by Alden Bianchi in Employee Benefit News, 12/25/2014.

TD 9705: Minimum Essential Coverage and Other Rules Regarding the Shared Responsibility Payment for Individuals, 11/26/2014  (How employer contributions to HRAs affect calculation of affordability and exemption from individual mandate penalty) https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-27998.pdf

 

Related topics:

The changing role of small business HRAs

Small business health plan compliance checklist

Taxation of health insurance in 2014

21st Century Cures Act

What options are available to employers who wish to help employees afford the cost of health care?

Provisions of the Affordable Care Act dramatically changed the tax treatment of employer-paid health benefits. Some of the most popular traditional health plans of the recent past now trigger an extremely harsh tax on the employer. Taxes of up to $36,500 per employee per year kicked in on July 1, 2015 for businesses with less than 50 employees. This post covers the rules for most small businesses with common law employees. It does not cover large businesses, businesses with union employees, one person businesses or S corporation owner/employees.

There are only five options still available to employers that do not trigger additional taxes:

  1. The employer pays part or all of the cost of a qualified group health insurance policy that is sponsored by the employer (the old traditional approach)
  2. The employer pays part or all of the cost of a excepted individual or group insurance (dental, vision, hospitalization and limited benefit indemnity insurance)
  3. The employer contributes to a payment plan or reimbursement plan that is integrated with a qualified employer-sponsored group health insurance plan (employer contributions integrated with plan #1 above)
  4. The employer contributes to a payment plans or reimbursement plans that integrate with excepted benefits (employer contributions integrated with #2 above)
  5. Regular employee bonuses through taxable wages that are not associated with the purchase of health insurance but can be used by employees, at the employee’s option, to buy individual coverage (a regular pay raise)

IRS warned that it is aware that product marketers have misled some small business owners into health plans that trigger tax penalties. References and other background information is available in other posts in this web site. My office offers advice to owners who fell victims to this bad advice. I am available for a limited flat fee telephone consultation to discuss these options in more detail and share ideas on how other small businesses have implemented their response to the new law.

Additional official guidance on this topic is anticipated. In the meanwhile, employers should not attempt any other health plan arrangement.

Historic employee benefit plan documents

I am aware that there is a demand for historic benefit plan documents – those that compiled with the laws of a period in the past – and I maintain a range of prototype documents used by my small business practice. At the same time, we know that it is not legal to use these documents to retroactively date any employee benefit plan.

Recently I’ve noticed an increase in requests for historic documents especially with regard to changes triggered by the 2010 health reform law. I can’t get involved if the intent seems to be improper and so I tend to simply ignore these inquiries to avoid any uncomfortable situation.

But I’ve recently decided that when I am hired for a consultation on a legitimate purpose and the topic of historic documents comes up, I can point to locations online where this information is already published. I would do this with a repeat of the stipulation that retroactive dating of employee benefit plans is not permitted.

18 Things Small Businesses Must Know About Health Reimbursement Arrangements

This article was effectively replaced by http://tonynovak.com/everything-your-small-businesses-needs-to-know-about-health-reimbursement-arrangements-hras/.

(Including the new ACA requirements for 2014)

If your small business reimburses employee health care costs in any manner, you need to be aware that the law has changed and there may be actions necessary right now to avoid severe tax and legal liabilities.

This expanded list of 18 items may help small business employers and tax advisers gain a better understanding of the new excise tax rules.

1. The federal government considers your arrangement to be subject to the extensive legal requirements of a “group health plan” even if you did not intend it so or think of it that way). The legal requirements include exposure under the Employee Retirement Income Security Act of 1974 for employee welfare benefit plans.

2. To avoid taxes and legal liabilities, the HRA must be integrated with an employer-provided ACA-compliant group health insurance plan.

3. Employers should not reimburse the cost of individual health insurance under any circumstances.*

4. Where an employee is covered by their spouse’s plan, employers should never reimburse the cost of the spousal coverage.

5. For purposes of deterring whether a violation has occurred, it does not matter whether the reimbursements were made on a pre-tax or after tax basis.

6. Taxation of health benefits to the employee is a completely separate issue from the applicability of excise taxes to the employer.

7. Employer who give taxable compensation bonuses should not make reference to any aspect of employee health care costs.

8. The minimum statutory tax penalty for unintentional violation is 10% of the amount the employer paid. The maximum amount of penalty is $100 per employee per day of violation, plus (if applicable) wage taxes plus (if applicable) interest and penalties.

9. Stand-alone HRAs are prohibited regardless of whether they are simply an informal arrangement or documented employee benefit plans.

10. An integrated HRA must meet additional requirements including the requirement that they be in writing and be communicated to employees separately from the insurance plan in order to make the benefits a tax-free to the employees.

11. Employees may not contribute to a HRA on a voluntary salary-deducted basis.

12. Employees who waive health insurance or have other non-employer provided insurance cannot participate in the HRA.

13. HRAs are not a tool to reduce the cost of employee health benefits. In fact HRAs may trigger the “Cadillac tax” provisions for rich health benefits in the future because they increase the total health benefits for employees.

14. Improper reimbursements trigger severe excise penalties under section 4980D of the Internal Revenue Code. This penalty is $100/day excise tax per applicable employee (which is $36,500 per year, per employee).Smaller penalties may apply in 2014 if the violation was not due to willful neglect. The penalties must be self-reported beginning in 2014 yet many employers may not even realize that they are in violation so the likelihood of interest and late payment penalties further compounds the problem.

15. If the employer is subject to the smaller 10% excise penalty for 2014 and then still does not correct the HRA plan for 2015, there would likely be a greater likelihood that the higher severe penalty would be assessed for the same repeat violation in the second year.

16. Employers that had a medical reimbursement plan prior to 2014 and have not updated their plan this year may unknowingly be subject to the excise tax. Apparently there are many small firms that don’t even know about this problem).

17. Employers affected by #14 above should act as quickly as possible to terminate or amend plans and make appropriate payroll tax adjustments if necessary to avoid additional lateness tax penalties.

18. Excise tax penalties are self-reported on IRS Form 8928 which has not yet been updated for 2014 to include provisions for HRAs.

Disclosure and clarification

The advice in this article is simplified for the purpose of clear communication regarding most small businesses. As with most aspects of tax and benefit law, there are special circumstances that may change this information. This article ignores the possibility of uninsured ACA-compliant health plans or grandfathered health plans simply because these are not common. *Also, many of these points do not apply to one person C corporations. The term “health insurance” in this discussion refers to primary ACA-compliant major medical insurance.

References

26 U.S.C. 4980D Failure to meet certain group health plan requirements

29 CFR 2510.3-1(j) http://www.gpo.gov/fdsys/pkg/CFR-2010-title29-vol9/pdf/CFR-2010-title29-vol9-sec2510-3-1.pdf

IRS Notice 2013-54 http://www.irs.gov/pub/irs-drop/n-13-54.pdf

Application of Affordable Care Act Provisions to Certain Healthcare Arrangements https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf

US Department of Labor, FAQs about Affordable Care Act Implementation (Part XXII) http://www.dol.gov/ebsa/faqs/faq-aca22.html

Why ACA Employer Mandate Rules Need More Guidance” by Alden Bianchi in Employee Benefit News, 12/25/2014.

TD 9705: Minimum Essential Coverage and Other Rules Regarding the Shared Responsibility Payment for Individuals, 11/26/2014  (How employer contributions to HRAs affect calculation of affordability and exemption from individual mandate penalty)https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-27998.pdf

 

Related topics:

Year-End Tax Moves for Small Businesses – Wall Street Journal 11/21/2014

Small business health plan compliance checklist

Taxation of health insurance in 2014

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