On December 7th, the Senate passed the 21st Century Cures Act (a measure passed by the House earlier this month). The Act includes a provision called the Small Business Healthcare Relief Act which expands the ability of small businesses to assist their employees in paying health expenses.
The Act allows small employers to establish qualified health reimbursement arrangements (HRA) that reimburse eligible employees and their family members for medical expenses, including individual health insurance premiums, up to an annual limit. Small employers in this case are defined as those who are not applicable large employers (ALEs). In general, an employer is an ALE if it employed at least 50 full-time equivalent employees on average in the prior calendar year.
The President is expected to sign the legislation and once signed, it should go into effect for plan years beginning on or after January 1, 2017.
Which Employers Are Eligible?
Eligible employers are those who are not ALEs as defined under the Affordable Care Act (ACA) and who do not offer a group health plan to any employees. An employer must offer a qualified HRA - one that is funded only by employer contributions and made is available to all eligible employees.
Which Employees Are Eligible?
Employees participating in qualified health plans are permitted to participate in the small employer HRA. Employees who can be excluded from participation are those who have not completed 90 days of service, are under age 25, part-time or seasonal employees, employees of a collective bargaining unit, and nonresident aliens.
What Are the Funding Limits?
For 2017, the HRA can reimburse up to $4,950 for an individual ($10,000 if the HRA provides for payments and reimbursements for family members). These limits are indexed for inflation and can increase on an annual basis. The annual amount will be prorated for employees who join the plan during the year.
What Expenses Can Be Reimbursed?
The HRA can pay for unreimbursed Section 213(d) expenses for employees and family members, including individual health insurance premiums. The employer’s annual contribution must be the same for all eligible employees; however, certain variations are permitted for HRA funds that are available to reimburse individual market coverage.
Employer contributions to a qualified HRA may vary with the price of an individual market policy based on the age of the eligible employee (and the ages of covered family members) or the number of an eligible employee’s covered family members.
Employers can set reimbursement limits based on coverage level, for example, funding an individual account up to $2,000 and a family account up to $6,000, or can reimburse based on a percentage of expense incurred (ex. the employer reimburses 75 percent of the cost of a covered expense such as an insurance premium).
How Are Employees Notified About the Plan?
A small employer providing a qualified HRA is responsible for notifying eligible employees no later than 90 days prior to the start of the plan year of the amount of benefit available to them under the HRA.
In addition, the notice will also be required to contain the following:
- A statement to the employee that it is their responsibility to provide the federal or state health insurance exchange with the amount being provided in HRA funds, as this amount will be used by the exchange when calculating need based premium assistance.
- A statement that if the employee is not covered by minimum essential coverage for any month of the tax year, they could be subject to a penalty under the Individual Mandate provisions of the ACA.
Failure to provide this notice will result in a penalty to the employer of $50 per applicable employee, up to a $2,500 maximum per calendar year. Transition relief is available for plans starting in the first quarter 2017 – they will have until April 1, 2017 to provide notices to employees.
How Does the Small Employer HRA Affect Affordability of Individual Coverage?
Employees applying for coverage on federal or state health insurance exchanges will need to disclose the amount that the employer is making available via the HRA. That amount will be used by the exchange in calculating whether an employee’s household income exceeds ACA affordability thresholds (for 2017 the percentage is 9.69 percent of household income), as well as determining subsidy amounts for those that meet the eligibility requirements. Those employees eligible for a subsidy will have their monthly amount reduced by the monthly HRA amount available through their employer.
Qualified small employer HRAs will not be considered group health plans under the Employee Retirement Income Security Act of 1974 (ERISA) and, with the exception of the Cadillac tax, will not be subject to the ACA’s market reforms, including ACA reporting for self-insured plans. Qualified HRAs will also not be subject to COBRA continuation requirements.
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