On December 13, 2016, President Obama signed the “21st Century Cures Act” into law, which includes a provision providing an exemption from the Affordable Care Act (ACA) rules applicable to group health plans for qualifying small employer health reimbursement arrangements (HRAs).
Background
HRAs are a type of health care reimbursement plan under which an employer either pays for or reimburses an employee for qualified health care expenses incurred by the employee and/or the employee’s spouse and dependents up to an established maximum dollar amount for a specific coverage period (generally, the calendar year). Prior to the enactment of the 21st Century Cures Act, all HRAs were considered to be “group health plans” for purposes of the ACA rules.
ACA guidance generally requires “group health plans” to provide certain preventive services without cost sharing and generally prohibits group plans from establishing any annual limit on the dollar amount of benefits for any individual. There are significant penalties imposed upon employers who sponsor group health plans that do not meet these ACA requirements.
The IRS previously issued guidance stating that a stand-alone HRA (one that is not integrated with a group health plan) would not meet the ACA preventive services requirement or the annual dollar limit prohibition for group plans. Therefore, the only way employers have been able to offer HRAs to their employees is when an HRA arrangement is properly integrated with a group health plan that meets the ACA requirements.
New law
Effective for plan years beginning after December 31, 2016, under the newly adopted 21st Century Cures Act, a “qualified small employer HRA” is not treated as a group health plan for purposes of the ACA rules. The new law also provides transition relief for small employers by extending the relief under Notice 2015-17 to plan years beginning on or before December 31, 2016. Notice 2015-17 provides transition relief for arrangements under which eligible small employers pay or reimburse employees for individual insurance premiums but does not provide transition relief to other arrangements (including stand-alone HRAs) under which eligible small employers reimburse employees for medical expenses other than insurance premiums.
A “small employer” for this purpose is generally defined as an employer that employed an average of fewer than 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year and that does not offer a group health plan to any of its employees.
A “qualified small employer HRA” for this purpose is generally an HRA that meets all of the following requirements:
- Maintained by a small employer that does not offer a group health plan to any of its employees;
- Provided on the same terms to all eligible employees (with certain limited exceptions described further below);
- Funded solely by the employer, with no salary reduction contributions allowed;
- Provides for the payment of or reimbursement of an eligible employee’s qualified medical care expenses incurred by the employee or the employee’s family members (determined under the terms of the HRA) after the employee provides proof of coverage; and
- The amount of payments and reimbursements do not exceed $4,950 (or $10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee) for 2016, subject to annual cost of living adjustments. (These amounts are prorated for an employee that is covered by such an arrangement for less than an entire year.)
With regard to the requirement in #2 above that the HRA plan be provided to all eligible employees, the term “eligible employee” means any employee of a small employer except employees who haven’t completed 90 days of service, employees who are less than 25 years old, part-time or seasonal workers, and certain nonresident aliens. In addition, employers will not fail the “same terms” requirement in #2 above merely because the employee’s permitted benefit under the arrangement varies in accordance with the variation in price of an individual insurance policy based on a) the age of the employee (and/or the employee’s family members), or b) the number of family members covered under the arrangement.
The new law requires employers to provide a written notice to each eligible employee which includes the following information:
- A statement of the amount of the employee’s permitted benefit (i.e., maximum dollar amount of payments and reimbursements which is allowed) under the arrangement for the year;
- A statement that the eligible employee should provide the permitted benefit amount in item a above to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and
- A statement that, if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax under Internal Revenue Code §5000A (penalties imposed for failure to maintain minimum essential coverage) for such month and reimbursements under the arrangement may be includible in gross income.
The written notice described above is required to be provided to employees no later than 90 days before the beginning of the plan year (or, if an employee becomes eligible during the plan year, no later than the date that the employee becomes eligible). In addition, an employer will not be treated as failing to provide a notice as long as the notice is provided no later than 90 days after enactment of the 21st Century Cures Act. An employer who fails to provide such a written notice to employees is subject to a $50 penalty per employee per incident of failure to provide a notice up to a maximum penalty of $2,500.
Employers are also required to report contributions to an employee’s qualifying HRA on the employee’s Form W-2 (beginning with the 2017 Form W-2).
On December 20, 2016 the Departments of Labor, Health and Human Services, and the Treasury issued a Frequently Asked Questions document that includes a question related to the implementation of the 21st Century Cures Act and its effect on previous guidance regarding HRAs. We have linked a full copy of the FAQ document here for your reference, noting that Question 3 relates specifically to the issue discussed herein.
Practical implications
Under the new law, an eligible small employer who does not otherwise offer health benefits to its employees through a group plan may provide a stand-alone qualifying HRA to its employees pursuant to the terms described above. Small employers who historically offered stand-alone HRAs to their employees and could no longer do so under the ACA rules may wish to offer the HRA benefit to its employees again, given that the benefit is generally nontaxable to employees (although, note above that reimbursements provided under the stand-alone HRA may be taxable to an individual who does not maintain minimum essential coverage). Employers should keep in mind that to qualify, pursuant to the requirements summarized above, the HRA benefit would be required to be offered to all employees (with very limited exceptions).
Professional Assistance
Due to the complexity of these rules, we encourage our clients to address them under the advice of employee benefits counsel. For any of our clients who may need to retain employee benefits counsel, please reach out to us for contact information for attorneys with whom we have worked who practice in this area.
Eligible employers wishing to provide such a benefit during the 2017 year should contact their employee benefits counsel as soon as possible due to the employee notice requirements of the new law.
The authors express appreciation to the following attorneys for their review of and input with respect to this article:
Allison McGrath Gardner, partner with the law firm Conner & Winters, LLP in Tulsa, Oklahoma
Danny Miller, partner with the law firm Conner & Winters, LLP in Washington, D.C.