The 21st Century Cures Act will allow employers with fewer than 50 full-time employees to offer a standalone health reimbursement account—without conflicting with Affordable Care Act requirements.
Now that the holiday season is behind us, insurance agents can focus on a significant piece of legislation which President Obama signed into law in mid-December and which took effect this week.
Over the course of 10 years, the 21st Century Cures Act—the result of a lobbying effort by pharmaceutical and medical device companies—will provide $4.8 billion in additional funding to the National Institutes of Health, the federal government's main biomedical research organization. It will also give the Food and Drug Administration more discretion regarding what types of studies are necessary for evaluating and approving new devices and medicines.
But one provision of the law has not attracted enough attention. The 21st Century Cures Act will allow employers with fewer than 50 full-time employees to offer a standalone health reimbursement account (HRA)—without conflicting with the Affordable Care Act’s (ACA) requirement that an HRA must integrate with another ACA health plan along with the resulting excise tax.
This means the new law permits a small employer to sponsor an HRA even if it does not offer a group health insurance plan to its employees. For many small employers that don’t offer health insurance coverage, employees may currently have coverage under a spouse or parent’s plan, or through an Exchange.
As indicated below, the new law provides some tax planning opportunities for smaller independent agencies and their small business clients, as these companies can fund an HRA to pay for their health insurance expenses, along with their employees’—which can include the employee’s individual health insurance policy premiums.
A Qualified HRA must meet the following conditions:
- It is provided on the same terms to all eligible employees. Notwithstanding this general rule, the benefit may vary based on the cost of health insurance tied to the employee’s age and/or number of family members covered. Thus, an employer could provide a greater benefit to an employee who is older or covers multiple family members.
- It is funded solely by the employer. No employee salary reduction contributions are allowed.
- It pays or reimburses an employee for medical expenses under Code Section 213(d) following proof of coverage. Eligible expenses include premiums for an individual health insurance policy.
- Reimbursements do not exceed $4,950 for an individual employee or $10,000 for family coverage. These amounts are pro-rated for an employee who is covered for a partial year and will be indexed in future years.
- All employees must be offered coverage other than:
- Employees with less than 90 days of service
- Employees younger than age 25
- Part-time and seasonal employees
- Union employees
- Non-resident aliens
The transition rule for 2017 allows employers to provide the notice within 90 days after the new law’s enactment date. An employee may be taxed on reimbursements from the Qualified HRA if they do not have minimum essential coverage. If an employee enrolls in a qualified health plan in the Marketplace, their premium tax credit will be reduced by the benefit available under the Qualified HRA. The employer is required to report the benefit available under the Qualified HRA on each employee’s Form W-2 beginning in 2017. Note: A Qualified HRA will not be treated as a group health plan for purposes of COBRA continuation coverage.
Independent agents should be sure that their smaller commercial clients are aware of this opportunity if it fits their approach to employee benefits.
Dave Evans is a certified financial planner and an IA contributor.