On December 13, 2016, President Obama signed the 21st Century Cures Act (the Act) that provides government funding and support for a number of health care initiatives. Significantly, the last section of the Act eases restrictions on health reimbursement arrangements (HRAs) sponsored by certain small employers.
Under the Affordable Care Act (ACA), employer-sponsored health plans must provide “minimum essential coverage” (MEC). The penalties for violating this rule are potentially significant: $36,500 per year, per affected individual. Additional penalties may be applied if the failure is discovered on audit, or is deemed to be “significant.” Regulations and other rulings providing guidance on this provision have indicated that it will be interpreted to prevent employer-sponsored HRAs, unless such programs are paired with a separate plan that, itself, provides MEC. The enforcing agencies recognized that this prohibition on “stand-alone” HRAs would prohibit many programs and arrangements traditionally established by smaller employers. Although the agencies continued to indicate that stand-alone HRAs were prohibited by ACA, penalties were waived through the end of 2016, to allow employers a transition period to revise their programs.
The Act formally reverses the HRA guidance when applied to a “qualified small employer health reimbursement arrangement” (an SEHRA). An SEHRA must be sponsored by an employer that is not subject to ACA’s “pay or play” mandate (i.e., the employer has fewer than 50 full-time equivalent employees). Additionally, all employees of the employer with more than three years of service must be eligible to participate, and the program must be entirely funded by employer contributions. If these requirements are met, the employer may provide for the reimbursement of the costs of medical care, including individual insurance premiums, up to $4,950/employee ($10,000 for SEHRAs that also provide dependent coverage), without running afoul of ACA.
It is important to note that coverage under an SEHRA will not itself satisfy the employee’s individual health care mandate responsibilities. However, it will impact the amount of a government subsidy for which the employee will be eligible. The Act obligates an employer that sponsors an SEHRA to notify participants of this impact. Failure to provide the notice can result in penalties assessed against the employer.