(December 9, 2016) The big news from Washington this week – aside from whatever latest Tweet has issued regarding the incoming administration – is the nearly unanimous bi-partisan passage of the 21st Century Cures Act. The bill, which now goes to President Obama for his expected signature, is chock-full of significant provisions that will impact employers and their health care offerings.
One provision of particular note applies to small employers (employers with fewer than 50 employees) that permits them to establish a general purpose, stand-alone health reimbursement arrangement (HRA). An HRA is, in effect, a defined contribution health plan. The employer – and only the employer – provides each employee participant with a defined amount of funding each year that the employee may use to pay for qualified medical expenses. Unlike a flexible spending account (FSA), unused HRA funds can be carried over from year to year by the employee without limitation. The employer contribution is not treated as taxable wages to the employee but is an expense deductible from income for the employer.
The HRA is not a new concept. For employees who have coverage under an insured plan, HRA funds can be applied to cover co-pays and deductibles or other qualified medical expenses for which the employee has no coverage, such as dental or vision expenses. But for years, small employers that wanted to help employees defray some portion of employee health care costs without the expense of sponsoring a full-fledged medical insurance plan also found that the HRA was the perfect way to do so. That was until the Affordable Care Act, which provided that (1) HRAs were covered “group health plans” under the law and, therefore, (2) were prohibited from placing annual or lifetime limits on “essential health benefits” as defined in the Act. These new ACA rules directly contradicted what an HRA was all about – providing a limited benefit to help employees defray health costs.
The net effect of these two ACA provisions was to outlaw use of an HRA that was not integrated with some other group health plan that complied with the ACA’s essential health benefits mandate and no annual or lifetime limits. For a number of small and start-up employers, this meant that employees could not be offered any health care coverage because of the expense of adopting a group insured plan, but also could not even be offered help to pay a portion of the cost of securing individual health insurance or to pay other medical expenses. The best that could be offered was an employee-funded flexible spending account – cold comfort for most employees, particularly lower wage earners.
That problem has now been solved by the 21st Century Cures Act. Employers that did not employ more than 50 employees (excluding seasonal workers) for more than 120 calendar days during the prior calendar year will be permitted to establish a qualified small employer health reimbursement arrangement (“QSEHRA”). While this is a major improvement for small employers and their employees, like all things associated with health care coverage, there are some strings attached:
- The plan may only be funded by the employer; no employee contributions are permitted.
- Reimbursement is limited to qualified medical care expenses under Code Section 213(d) incurred by the employee or his/her family members – though this can include reimbursement for premiums for individual health insurance market policies.
- The maximum permitted annual reimbursement is $4,950 ($10,000 for arrangements that also cover family members). These limits are prorated for years of partial employment, and will be subject to adjustment for inflation in coming years.
- Coverage and contributions must be offered without discrimination to all employees (some variations in the amount of reimbursement may be permitted between employees in different geographic areas based upon local individual health insurance pricing).
- Employers electing to provide QSEHRA coverage must issue compliant notices to all employees 90 days before each calendar year (for 2017 only, within 90 days of the effective date of the Act).
There are a number of other transitional and compliance nits to pick, but for many small employers this will be welcome relief. You can count on Rhoades McKee’s Employment Law team to keep you informed of the latest legal developments affecting employers. If you would like to learn more about establishing a QSEHRA or have other questions about employer sponsored health care options, please contact us.More Publications