News coverage of the 21st Century Cures Act, passed with large bipartisan support and signed into law by President Obama on December 13, 2016, primarily focused on the provisions that increase funding for medical research and expedite approval of new drugs and medical devices. For certain companies, however, the law also revived a popular tool related to employer-provided health benefits.
The Affordable Care Act currently prohibits a previously common practice of small employers (fewer than 50 full-time employees or equivalents) to reimburse employees who purchased private, individual health insurance coverage. Small employers typically used a Health Reimbursement Arrangement (HRA) to fund employees’ purchase of nongroup plans or reimburse them after the fact.
The 21st Center Cures Act now permits small employers that do not offer group health coverage to employees to instead offer HRAs, starting in 2017. The law places certain requirements on these HRAs, and also caps employer contributions at $4,950 for single employees and $10,000 for family coverage. It also spares small employers who offered a standalone HRA to employees prior to January 1, 2017, from the previous IRS penalty for using this reimbursement method.
Uncoupling the HRA from employer-provided health coverage gives small businesses more flexibility in designing employee benefit packages. Employers should keep in mind that HRA reimbursements will only be tax-free if the employee’s individual or family health coverage meets “minimum essential coverage” as defined by the ACA, and receiving a reimbursement via an HRA may impact the employee’s eligibility for or level of tax credit.
With 2017 just around the corner, many employees have already designed their benefits program for the next calendar. Furthermore, it is unclear whether this provision would survive any future legislative changes related to health care under the new administration. For the time being, however, employers should consider this new option and how it might support their benefits program moving forward.
Contributed by Ethel A.M. Nawrocki, CPA, Principal in RKL’s Tax Services Group. Ethel has 25 years’ experience providing tax, accounting and consulting services to the manufacturing, wholesale, distribution, construction and real estate rental industries.