The Affordable Care Act (ACA, Obamacare) included a trap for small employers who let their employees purchase their own health insurance, then reimbursed them for all or part of the cost. Employers making such reimbursements were subject to a penalty of $100 per employee per day. Congress has now passed a law allowing the reimbursements, and President Obama is expected to sign it.
Background
Before the ACA, an employer could reimburse an employee’s substantiated premiums for medical insurance which the employee purchased on his own, and the payments could be excluded from the employee’s gross income. This put reimbursement plans on par with the more usual employer-provided insurance plans for tax purposes. Such an arrangement is called a Health Reimbursement Arrangement (HRA).
Under Obamacare, an HRA is considered a group health plan, and must meet certain requirements of ACA. But, according to guidance issued by the IRS, an HRA generally fails to meet the annual dollar limit prohibition, and the preventive service requirements (see Notice 2013-54 and 2015-17 for more information).
The ACA includes a penalty for employers who offer a group health plan that does not meet the group health plan requirements. The penalty is huge – $100 per affected employee per day. So, an employer would face a penalty of $36,500 per year for each employee that’s receiving reimbursements. It’s important to note that the ACA exempts small employers – those with fewer than 50 full-time equivalent employees – from most of its provisions. But, the penalty applies to any employer making prohibited reimbursements, even if they have fewer than 50 employees. The reasoning is that the employees could be going to the ACA marketplace and possibly receiving assistance, even though their employer is helping with the costs. The idea is that assistance to individuals via the ACA marketplace is intended for people who aren’t getting help from their employer. But, small employers don’t have to report their reimbursements, so the IRS can’t stop those employees from also applying government assistance.
New Law
Under the new law, an employer with fewer than 50 employees can establish an HRA for its employees without being penalized, with the following provisions:
- The HRA would have to be funded solely by the employer to reimburse employees’ medical expenses, including premiums for individual health insurance coverage or Medicare supplemental insurance.
- The reimbursements are limited to $4,950 per year for individual coverage, or $10,000 for family coverage. These amounts will be indexed annually for inflation.
- An employee offered affordable individual health insurance coverage under the HRA would not be eligible for a premium assistance tax credit.
- The employer would have to report contributions to the HRA on their employees’ W-2s.
The law is applicable beginning Jan. 1, 2017, but it extends previously granted transition relief through Dec. 31, 2016. So, no one should be penalized for an HRA if it’s otherwise implemented correctly.
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