Small businesses can now reimburse employee medical expenses

The 21st Century Cures Act was signed into law December 13, 2016, making it possible for small businesses to use health reimbursement arrangements (HRAs) to fund employees purchasing individual health plans on the open market.

More specifically, the legislation allows small employers with fewer than 50 full-time employees (or equivalents) that don't sponsor a group health plan to provide HRAs to pay for qualified out-of-pocket medical expenses and for nongroup plan health insurance premiums. This includes reimbursements for plans purchased on public health care exchanges under the Affordable Care Act (ACA).

Previous rules put in place (IRS Notice 2013-54 and 2015-17) imposed a penalty on small employers who wanted to help their employees offset health care costs by reimbursing for the purchase of nongroup health insurance. Penalties were as high as $100 per day, per employee.

Details of the Law

The 21st Century Cures Act creates a new type of HRA—the qualified small employer health reimbursement arrangement (QSEHRA). Reimbursements are made on a pre-tax basis as long as the employee maintains minimum essential health coverage. The legislation also specifies that:

• The maximum reimbursement for health expenses that small employers can provide through employee QSEHRAs is $4,950 for single coverage and $10,000 for family coverage, to be adjusted annually for inflation.
• Small employers that choose to provide a QSEHRA must offer it to all full-time employees except those who have not yet completed 90 days of service, are under 25 years of age, or who are covered by a collective bargaining agreement for accident and health benefits. Part-time and seasonal workers may also be excluded.
• The arrangement must be provided on the same terms to all eligible employees, although the act allows benefits under the arrangement to vary based on age and family-size variations in the price of an insurance policy in the relevant individual health insurance market.
• Benefits must be reported on employee W-2s and the benefit will be taken into account in determining any premium tax credit the employee may be eligible for.

The new rules go into effect for years beginning after December 31, 2016. In addition, the bill extends the transition relief procedures of Notice 2015-17  through December 31, 2016, exempting small businesses from the $100 per day penalty if they had not yet complied with new ACA rules regarding reimbursement.

Employee Notice

An employer funding a qualified small employer HRA for any year must provide a written notice to each eligible employee. This notice must be provided within 90 days of the beginning of the year. For employees who become eligible to participate in the HRA during the year, the notice must be provided by the date on which the employee becomes eligible to participate. The notice has to 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 of the premium assistance tax credit, the employee should provide the Exchange with information about the HRA’s maximum benefit; and
• A statement that, if the employee is not covered under minimum essential coverage for any month, the employee may be subject to a penalty under the ACA’s individual mandate and reimbursements under the HRA may be includible in gross income.

If an employer fails to provide the required notice for a reason other than reasonable cause and willful neglect, the employer will be subject to a penalty of $50 per employee for each failure, up to a maximum annual penalty of $2,500 for all notice failures during the calendar year.