In December, President Obama signed the 21st Century Cures Act (Cures Act) into law – which is good news for small businesses. Under the Cures Act, eligible small employers may adopt health reimbursement arrangements (HRAs) to reimburse employees for the cost of premiums for individual or family health coverage without being subject to group-health plan requirements.

The Need for a “Cure”

Historically, small businesses could provide a health benefit to their employees by reimbursing an employee’s substantiated health insurance premium and medical expenses (excludable from employees’ taxable income), but the Affordable Care Act (ACA) changed that. Although, HRAs generally have been considered to be group health plans for tax purposes, the ACA put restrictions on employer-provided group health plans ruling that “standalone” HRAs didn’t comply with ACA requirements. Those that continued to offer HRA were dealt a steep penalty of $100 per day-per employee – maxing out at $36,500 per employee a year.

A potential expensive cause for concern, most small employers just couldn’t afford to help employees with medical premiums and expenses by keeping their HRAs.

The New HRA Era

With the new act in place, effective for the 2017 tax year, there is an exemption from the ACA penalty for qualified small employer health reimbursements arrangements (QSEHRAs).

To qualify for the exemption QSEHRAs must satisfy the following requirements:

  • The employer has fewer than 50 full-time employees, meaning it isn’t an “applicable large employer” subject to the employer shared-responsibility provision under the ACA.
  • The employer doesn’t offer a separate group health plan to any of its employees.
  • The HRA is provided on the same terms to all eligible employees, except that an employee’s benefit can vary based on criteria such as age and family size.
  • The HRA provides payment or reimbursement for medical care expenses, which can include individual health insurance as well as out-of-pocket expenses.
  • The amount of payments and reimbursements don’t exceed $4,950 for individual employees or $10,000 for family coverage, subject to cost-of-living adjustments in future years. (The limits will be prorated for employees who aren’t covered by the HRA for an entire year.)

Who’s Eligible

There are some restrictions as to what makes an employee eligible for an HRA. Generally, employees are eligible except if they:

  • Have not been employed for at least 90 days
  • Are under the age of 25
  • Only work on a part-time basis
  • Are covered in a collective bargaining unit
  • Belong to certain nonresident alien groups

Additional Requirements:

  • Employees seeking the reimbursement must have proof of medical coverage
  • The reimbursed funds must be used for medical expenses of the employee (or any family members covered on their plan).
  • The contributions to the QSEHRA must only be made by the employer (no employee salary deferrals).
  • Employees must have “minimum essential coverage” for the month, or the QSEHRA reimbursement for that month will be taxable.
  • Employers must provide notice to employees at least 90 days before a plan year (for 2017, employers have until Mar. 13, 2017 to comply) that includes information about the QSEHRA and reimbursement amount.
  • Employers must disclose that the QSEHRA may affect the employee’s premium tax credit on their marketplace health plan.

Moving Forward

With President-elect Trump taking office later this month there are still many unknowns as it relates to the ACA. During the election, he vowed he would repeal the act – putting the future of the Cures Act in limbo. But for now, businesses should begin to move forward as if ACA will live on.

If you have any questions regarding this new legislation and how it impacts your business, please contact the trusted tax advisors at Doeren Mayhew.