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New law allows stand-alone HRAs for small employers

January 9, 2017 Article 4 min read
Jonathon Trionfi
Small business owners have a new benefit option — they can contribute to a stand-alone HRA, instead of offering a group health plan, to help employees pay for out-of-pocket medical expenses. Our bulletin provides an overview and steps for eligible employers.

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On Dec. 13, 2016, the 21st Century Cures Act (Act) was signed intolaw. The Act allows small employers that do not maintain grouphealth plans to establish stand-alone health reimbursementarrangements (HRAs), effective for plan years beginning on or afterJan. 1, 2017. This new type of HRA is called a “qualified smallemployer HRA.”

Due to the Affordable Care Act (ACA), most stand-alone HRAshave been prohibited since 2014. This new law creates a specialexception for small employers that are not subject to the ACA’semployer shared responsibility rules. Instead of offering a grouphealth plan, small businesses may use a qualified small employerHRA to reimburse employees’ out-of-pocket medical expenses,including their premiums for individual health insurance coverage,on a tax-free basis.

Action steps

Small employers that do not sponsor group health plans may wantto consider implementing a qualified small employer HRA to helptheir employees pay for out-of-pocket medical expenses. Becausethere are specific design requirements for these HRAs, including amaximum benefit limit and an employee notice, small businessesshould work with their advisors to make sure their HRAs arecompliant.

ACA reforms

HRAs are employer-funded arrangements that reimburseemployees for certain medical care expenses on a tax-free basis,up to a maximum dollar amount for a coverage period. The ACAincludes market reforms that limit the availability of HRAs,beginning in 2014. Under these reforms, most stand-alone HRAshave been prohibited. A stand-alone HRA is an HRA that is notoffered in conjunction with a group health plan.However, the Act creates an exception to this prohibition for qualified small employer HRAs.

Effective Jan. 1, 2017, an eligible employer may offer a stand-alone HRA without incurring penalties under the ACAif the HRA meets the requirements for a qualified small employer HRA. This type of HRA can be used to helpemployees pay for their own health insurance policies and reimburse other out-of-pocket medical expenses.

Beginning in 2017, small businessowners have a new benefit optionavailable to them—they cancontribute to a stand-alone HRAinstead of offering a group healthplan.

Qualified small employer HRA

Eligible employers

To be eligible to offer a qualified small employer HRA, an employer must meet the following two requirements:

  1. The employer is not an applicable large employer (ALE) that is subject to the ACA’s employer sharedresponsibility rules. In general, this means that the employer must have fewer than 50 full-timeemployees, including full-time equivalents.
  2. The employer does not maintain a group health plan for any of its employees.

HRA design requirements

Like all HRAs, a qualified small employer HRA must be funded solely by the employer. Employees cannot maketheir own contributions to an HRA, either directly or indirectly through salary reduction contributions. In addition,the following requirements apply to qualified small employer HRAs:

  • Maximum benefit
    • The maximum benefit available under the HRA for any year cannot exceed$4,950 (or $10,000 for HRAs that also reimburse medical expenses of theemployee’s family members).
    • These dollar amounts are subject to adjustment for inflation for years beginningafter 2016.
    • The maximum dollar limits must be prorated for individuals who are not covered bythe HRA for the entire year.
  • Eligibility and benefit rules
    • The HRA must be provided on the same terms to all eligible employees except:
      • The maximum benefit may vary based on age and family-size variations inthe price of an individual policy in the relevant individual health insurancemarket
      • The HRA may exclude certain categories of employees, includingcollectively bargained employees, employees who are part time orseasonal, employees who have not completed 90 days of service,employees who are younger than age 25 and non-resident aliens withoutearned income from sources within the United States.
  • Reimbursements
    • HRA payments or reimbursements must be limited to medical expenses (as definedin Tax Code Section 213(d)) incurred by the employee or the employee’s familymembers, after the employee provides proof of coverage.
    • This would include, for example, premiums for individual health insurance coverageand other out-of-pocket medical expenses.

Employee notice

An employer funding a qualified small employer HRA for any year must provide a written notice to each eligibleemployee. This notice must be provided within 90 days of the beginning of the year. For employees who becomeeligible to participate in the HRA during the year, the notice must be provided by the date on which the employeebecomes eligible to participate.

The notice must include the following information:

  • The employee’s maximum benefit under the HRA for the year
  • A statement that, if the employee is applying for advance payment ofthe premium assistance tax credit, the employee should provide theExchange with information about the HRA’s maximum benefit
  • A statement that, if the employee is not covered under minimumessential coverage for any month, the employee may be subject to apenalty under the ACA’s individual mandate and reimbursementsunder the HRA may be includible in gross income.

If an employer fails to provide this notice for a reason other than reasonable cause, the employer may be subjectto a penalty of $50 per employee for each failure, up to a maximum annual penalty of $2,500 for all noticefailures during the year.

Transition relief

Employers will not betreated as violating thenotice’s timing requirementsif the notice is provided nolater than 90 days after theAct’s enactment, or March13, 2017.

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