President Obama has just signed the 21st Century Cures Act (the Cures Act). Effective January 1, 2017, the Cures Act allows small employers to once again offer health reimbursement arrangements (HRAs) to their employees.
Before the Affordable Care Act (the ACA), companies were allowed to offer HRAs. Unlike flexible spending accounts (the use-it-or-lose-it accounts), HRAs were paid for only by the company and could roll over from year to year. Employees could use these HRAs to pay for health insurance premiums or medical expenses that were not otherwise covered, like deductibles. Under the ACA, HRAs were largely prohibited unless the company also offered group health coverage.
The Cures Act once again makes HRAs permissible for small employers, though in a somewhat modified form. The major provisions are as follows:
- Who is a qualifying small employer? An employer that has fewer than 50 full-time equivalent employees and does not offer a group health plan.
- Must all employees be eligible for the HRA? No. However, only certain employees may be excluded. An HRA does not have to be offered to employees who have been employed for less than 90 days, are under 25 years old, are part-time or seasonal, are covered by a collective bargaining agreement, or are resident aliens without U.S. source income.
- May the employee contribute to the HRA? No. Salary reduction contributions are not permitted. The HRA must be funded only by the company.
- What expenses can be reimbursed by the HRA? Expenses that constitute "medical care," including health insurance premiums, incurred by the employee or one of the employee's family members.
- Is there a maximum benefit? Yes. The HRA may reimburse up to $4,950 per year for an employee with employee-only coverage, and up to $10,000 per year for an employee with coverage for the employee and at least one dependent. These amounts are pro-rated if the employee is not covered by the HRA for the entire year. (These amounts are indexed to inflation and will increase in future years.)
- Are the reimbursements taxable income to the employee? No, provided that the employee is enrolled in minimum essential coverage. Reminder: "Minimum essential coverage" includes most individual and group health insurance, but does not include dental-only coverage, vision-only coverage, or coverage for a specified disease or illness.
- Is a notice required? Yes. Employees eligible for the HRA on the first day of a given year must be given notice at least 90 days before the first day of the year. However, notice will be also be considered timely if it is given within 90 days after the Cures Act was adopted.
HRAs are subject to ERISA (plan documents and summary plan descriptions are required) but are exempt from COBRA. HRAs must pass certain nondiscrimination testing.
This client alert covers only the highlights of the HRAs permitted by the Cures Act. If you or your company is interested in offering an HRA, please contact one of the employee benefits attorneys at Venable.