Health Reimbursement Arrangements

Relief in sight for small employers

When most people hear the term “Obamacare,” or “Affordable Care Act,” the next thing on their mind isn’t usually health reimbursement arrangements. Oddly enough, for many business owners, it probably should be. Of all the new laws signed in connection with the Affordable Care Act, or “ACA,” the laws surrounding health reimbursement arrangements carry one of the highest penalty provisions. How high? Try $100 per employee, per day that an employer is not complying with the late 2013 law change.

This penalty, imposed under Internal Revenue Code Section 4980D, can result in an employee penalty of up to $36,500 per year for each employee participating in a non-qualified health reimbursement arrangement. For example: an employer with 10 employees participating in a non-qualified health reimbursement arrangement for the entire year would be subject to a $365,000 penalty for the year! For clarification, most health reimbursements are non-qualifying according to the law changes in late 2013. So, if an employer wants to reimburse an employee for health insurance that the employee pays for themselves, that employer would be subject to a penalty.  Luckily, there is a new light at the end of the tunnel for small employers — an exception from the penalty.

Late in 2016, President Obama passed the 21st Century Cures Act which, among other things, contained a provision for transition relief from the health reimbursement penalties for small employers. Prior to this law, which is effective for plans beginning January 1st, 2017 and later, the IRS granted transition relief to small employers  only through June 30th, 2015. Therefore, for the 18 months between June 30th, 2015 and now, employers were generally subject to the penalty if they were participating in a health reimbursement arrangement. With the passing of the 21st Century Cures Act, small employers will be exempt from this penalty going forward if they meet certain requirements of the new law.

To be protected by the law, an employer must establish a “Qualified Small Employer Health Reimbursement Arrangements,” (or QSEHRA) plan. In order for an employer to qualify for QSEHRA, they must not be an “Applicable Large Employer,” under the ACA’s employer shared responsibility provisions. An Applicable Large Employer is generally an employer that has an average of 50 or more full time equivalent employees during the previous calendar year. The new health reimbursement relief will apply to employers with less than 50 full time equivalent employees in the preceding year.

In addition to the employer not being an Applicable Large Employer, the health reimbursement arrangement plan itself must meet certain criteria, including:

  • All contributions must be made solely by the employer. While qualifying employers can again make pre-tax reimbursement payments to employees without penalty, employee contributions to the plan aren’t allowed
  • Employees must provide the employer with proof of the expense for medical care provided to the employee or their family member. Reimbursement without proof isn’t allowed
  • The arrangement must be offered to all eligible employees on the same terms. There are exceptions for varied reimbursement amounts based on age and family size of the employee. There are also exceptions where the employer doesn’t have to offer the arrangement to employees working for the company less than 90 days, part-time and seasonal employees, members of collective bargaining units (unions), employees under age 25, and nonresident aliens
  • The amount of reimbursements allowed for each employee per year cannot exceed $4,950, or $10,000 if the arrangement provides reimbursement for family members in addition to the employee
  • The employer must provide notice to employees of this health reimbursement plan within a specified timeframe depending upon when the plan is offered

This new relief will be welcomed for qualifying small employers who want to reimburse employees for health insurance. But there are still many rules to follow and limitations not outlined in this article. If you think this new law change may be applicable to your business and you’d like to discuss your particular case further, please contact us at 925.271.8700 or at info@ssfllp.com.