Checkpoint Special Study: 21st Century Cures Act Establishes Small Employer HRAs
Checkpoint Special Study: 21st Century Cures Act Establishes Small Employer HRAs
Sec. 18001 (Exception From Group Health Plan Requirements for Qualified Small Employer Health Reimbursement Arrangements) of H.R. 34, the 21st Century Cures Act
On December 13, President Obama signed into law the “21st Century Cures Act” (the Act). In addition to providing a medical innovation package that funds medical research, accelerates cutting-edge treatments for rare diseases, and makes significant reforms to the mental health system, the Act also allows small employers to provide Health Reimbursement Arrangements (HRAs) to their employees without facing penalties for failing to satisfy certain Affordable Care Act (ACA) requirements.
Small Employer HRAs Exempted from Group Health Plan Requirements
HRAs are arrangements under which an employer agrees to reimburse medical expenses (as defined in Code Sec. 213(d)—including health insurance premiums) up to a certain amount per year, with unused amounts available to reimburse medical expenses in future years. The reimbursement is excludable from the employee’s income.
HRAs generally are considered to be group health plans for purposes of the Code, Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act (PHS Act), provisions of which were incorporated into the Code by the ACA.
The ACA contains certain market reforms that generally apply to group health plans (“group health plan requirements”), including the following provisions:
- a. PHS Act § 2711, which provides in part that a group health plan (or a health insurance issuer offering group health insurance coverage) may not establish any annual limit on the dollar amount of benefits for any individual.
- b. PHS Act § 2713, which requires non-grandfathered group health plans (or health insurance issuers offering group health insurance plans) to provide certain preventive services without imposing any cost-sharing requirements for these services (the preventive services requirements).
IRS distinguishes between employer-funded HRAs that are “integrated” with other coverage as part of a group health plan (which can meet the PHS Act § 2711 annual limit rules) and HRAs that are not so integrated, i.e., “stand-alone” HRAs (which cannot meet the PHS Act § 2711 lifetime and annual limit rules). Similarly, IRS says a stand-alone HRA would not meet the PHS Act § 2713 preventive services requirement. (Notice 2013-54, 2013-40 IRB 287)
Code Sec. 4980D imposes an excise tax on any failure of a group health plan (including a stand-alone HRA) to meet the Code’s group health plan requirements.
The ACA’s complex employer-shared responsibility provisions apply only to applicable large employers (ALEs), defined for 2016 as employers that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding year.
Employers, whether or not they are ALEs, are subject to the Code Sec. 4980D excise tax if they maintain group health plans that don’t meet the ACA market reform requirements. Notice 2015-17, 2015-10 IRB 845, however, provided that the Code Sec. 4980D excise tax will not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for, individual health policy premiums or Medicare part B or Part D premiums (1) for 2014, for employers that are not ALEs for 2014, and (2) for January 1 through June 30, 2015, for employers that are not ALEs for 2015.
Thus, under pre-Act law, after June 30, 2015, small employers that maintain a stand-alone HRA could be liable for the Code Sec. 4980D excise tax.
New law. The Act provides that a “qualified small employer HRA” is not treated as a group health plan for income tax purposes (except for Code Sec. 4980I(f)(4) (which defines a group health plan), as amended, and notwithstanding any other provision of the Code). (Code Sec. 9831(d)(1), as amended by Act Sec. 18001(a)) There are similar exceptions for ERISA and PHS Act purposes. (Act Sec. 18001(b) and (c).
A qualified small employer HRA is one that satisfies the following requirements:
- 1. It is maintained by an eligible employer. (Code Sec. 9831(d)(2)(A)(ii)) An eligible employer is an employer that is not an ALE as defined in Code Sec. 4980H(c)(2) – i.e., it employs fewer than 50 employees — and does not offer a group health plan to any of its employees. (Code Sec. 9831(d)(3)(B))
- 2. It is provided on the same terms to all eligible employees. (Code Sec. 9831(d)(2)(A)(ii)) An eligible employee is any employee of an eligible employer, except that the arrangement may exclude from consideration employees who haven’t completed 90 days of service, employees who haven’t attained age 25, part-time or seasonal workers, employees covered in a collective bargaining unit, and certain nonresident aliens. (Code Sec. 9831(d)(3)(A))
- 3. It is funded solely by an eligible employer, and no salary reduction contributions may be made under the HRA. (Code Sec. 9831(d)(2)(B)(i))
- 4. It provides, after the employee provides proof of coverage, for the payment of, or reimbursement of, an eligible employee for expenses for medical care (as defined in Code Sec. 213(d)) incurred by the eligible employee or the eligible employee’s family members (as determined under the HRA’s terms) (Code Sec. 9831(d)(2)(B)(ii)) and
- 5. The amount of payments and reimbursements do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee). (Code Sec. 9831(d)(2)(B)(iii)) For any year beginning after 2016, the above dollar amounts are subject to cost of living increases. (Code Sec. 9831(d)(2)(D)(ii)) For employees who are covered by a qualified arrangement for less than an entire year, the above dollar amounts are prorated.Code Sec. 9831(d)(2)(D)(i))
An arrangement will not fail to be treated as provided on the same terms to each eligible employee merely because the employee’s permitted benefit under such arrangement varies in accordance with the variation in the price of an insurance policy in the relevant individual health insurance market based on— (i) the age of the eligible employee (and, in the case of an arrangement which covers medical expenses of the eligible employee’s family members, the age of such family members), or (ii) the number of family members of the eligible employee the medical expenses of which are covered under such arrangement. (Code Sec. 9831(d)(2)(C))
The term “permitted benefit” means, with respect to any eligible employee, the maximum dollar amount of payments and reimbursements which may be made under the terms of the qualified arrangement for the year with respect to such employee. (Code Sec. 9831(d)(3)(C))
The Act also provides transitional relief by treating Notice 2015-17, as applying to any plan year beginning on or before Dec. 31, 2016. (Act Sec. 18001(a)(7)(B))
Effective date. The exemption of small employer HRAs from the group health plan requirements is generally effective for years beginning after Dec. 31, 2016, with transitional relief applying before that time. (Act Sec. 18001(a)(7)(A))
Small Employer HRA Reporting & Notice Requirements
Code Sec. 6652 imposes penalties for failure to file certain information returns and registration statements.
Code Sec. 6051(a) requires W-2 reporting of compensation subject to either FICA tax or income tax withholding. Some amounts required to be reported under that section include amounts contributed to Archer Medical Savings Accounts, amounts contributed to health savings accounts, and the value of applicable employer-sponsored health insurance coverage.
New law. A small employer funding a qualified HRA for any year must, not later than 90 days before the beginning of such year (or, in the case of an employee who is not eligible to participate in the arrangement as of the beginning of such year, the date on which such employee is first so eligible), provide a written notice to each eligible employee which includes (i) a statement of the amount of the employee’s permitted benefit under the arrangement for the year; (ii) a statement that the eligible employee should provide the information described in clause (i) to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; (iii) a statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax under Code Sec. 5000A (i.e., the individual mandate) for such month, and reimbursements under the arrangement may be includible in gross income. (Code Sec. 9831(d)(4), as added by Act Sec. 18001(a)(1))
If an employer fails to provide the required notice, unless such failure is shown to be due to reasonable cause and willful neglect, the employer will be subject to a $50 per-employee, per-incident-of-failure penalty, subject to a $2,500 calendar year maximum for all such failures. (Code Sec. 6652(o), as added by Act. Sec. 18001(a)(5))
Employers also have to report the total amount of permitted benefit under Code Sec. 9831(d)(3)(C) for the year under a qualified arrangement on their employees’ W-2s. (Code Sec. 6051(a)(15), as added by Act Sec. 18001(a)(6))
Effective date. The notice and reporting requirements are effective for years beginning after Dec. 31, 2016. (Act Sec. 18001(a)(7)(A))The Code Sec. 6652(o) penalty applies to notices with respect to years beginning after Dec. 31, 2016; however, the Act provides transition relief for Code Sec. 6652(o) under which a person won’t be treated as failing to provide a written notice as required under Code Sec. 9831(d)(4) if such notice is provided not later than 90 days after the date of the Act’s enactment. (Act Sec. 18001(a)(7)(D))
The W-2 reporting requirements apply to calendar years beginning after Dec. 31, 2016. (Act Sec. 18001(a)(7)(E))
Limitation on Exclusion from Gross Income
Code Sec. 106 provides that an employee ‘s gross income doesn’t include employer-provided coverage under an accident or health plan that compensates that employee for the personal injuries or sickness of the employee, the employee’s spouse, or dependents.
New law. Under a newly added provision, for purposes of Code Sec. 105 (Amounts received under accident and health plan) and Code Sec. 106 (Contributions by employer to accident and health plans), payments or reimbursements from a qualified small employer HRA of an individual for medical care (as defined in Code Sec. 213(d)) will not be treated as paid or reimbursed under employer-provided coverage for medical expenses under an accident or health plan if, for the month in which such medical care is provided, the individual does not have minimum essential coverage under Code Sec. 5000A(f). (Code Sec. 106(g), as added by Act Sec. 18001(a)(2))
Effective date: This treatment of payments and reimbursements is effective for years beginning after Dec. 31, 2016. (Act Sec. 18001(a)(7)(A))
Coordination with Premium Tax Credit Provisions
Code Sec. 36B(a) provides a premium tax credit to eligible taxpayers who enroll in a qualified health plan, or have a spouse or dependent enrolled in a qualified health plan, through a Marketplace. A taxpayer is generally only allowed a premium tax credit if his or her household income is at least 100% and not more than 400% of the Federal poverty line (FPL) for the taxpayer’s family size.
A taxpayer’s premium tax credit with respect to any coverage month is the lesser of: (a) the premiums for the plan or plans in which the taxpayer or one or more members of the taxpayer’s family enroll and (b) the excess of the premiums for the applicable second lowest cost silver plan covering the taxpayer’s family over the taxpayer’s contribution amount. (Code Sec. 36B(b)(2)) A taxpayer’s contribution amount is the product of the taxpayer’s household income and an “applicable percentage” that increases as the taxpayer’s household income increases.
Code Sec. 36B(c)(2)(B) provides that a coverage month does not include any month with respect to an individual if, for such month, the individual is eligible for minimum essential coverage other than eligibility for coverage in the individual market described in Code Sec. 5000A(f)(1)(C). Under Code Sec. 36B(c)(2)(C), an individual is not treated as eligible for employer-sponsored minimum essential coverage if the required contribution with respect to the plan exceeds 9.5% of the taxpayer’s household income.
Sec. 1411 of the ACA provides procedures for determining the eligibility of an individual for Exchange participation, premium tax credits and cost-sharing reductions (Exchange subsidies), and exemptions from the individual mandate. Sec. 1411(b)(3) specifically provides the information that an enrollee claiming an Exchange subsidy must provide to the Exchange—generally, information on income and family size, as well as on any changes in circumstances that would affect eligibility.
New law. For any month that an employee is provided a small employer HRA that constitutes affordable coverage, the employee is not eligible for a premium assistance tax credit under Code Sec. 36B. (Code Sec. 36B(c)(4)(A), as amended by Act Sec. 18001(a)(3)) The Act sets out a definition for “affordable” for this purpose, and also contains provisions for when an employee is provided a qualified small employer HRA for less than an entire year. (Code Sec. 36B(c)(4)(C))
The Act also provides that an Exchange subsidy applicant must provide to the Exchange the amount of the enrollee’s permitted benefit under a qualified small employer HRA. (Act Sec. 18001(a)(6)(B))
Effective date: The rule making certain employees with small employer HRAs ineligible for premium assistance tax credits is effective for tax years beginning after Dec. 31, 2016. (Act Sec. 18001(a)(7)(C)) The rule requiring information to be provided to an Exchange generally applies to applications for enrollment made after Dec. 31, 2016, but transition relief applies. (Act Sec. 18001(a)(7)(F))
Application of “Cadillac” Tax
For tax years beginning after Dec. 31, 2019, a 40% excise tax will apply to “applicable employer-sponsored coverage” that provides an “excess benefit”—generally, high cost employer-sponsored health plans. The tax is known as the “Cadillac tax.” “Applicable employer-sponsored coverage” generally means, with respect to any employee, coverage under group health plan made available to the employee by an employer which is excludable from the employee’s gross income under Code Sec. 106.
The definition of a “group health plan” is provided in Code Sec. 4980I(f)(4) via reference to Code Sec. 5000(b)(1).
New law. The Act amends Code Sec. 4980I(f)(4) by providing that Code Sec. 9831(d)(1) (i.e., the exclusion from group health plan treatment for small employer HRAs) does not apply for purposes of the Cadillac tax. In determining the cost of a small business HRA, the cost of coverage is equal to the amount described in Code Sec. 6051(a)(15) (i.e., the amount reported on the employee’s W-2). (Code Sec. 4980I(f)(4), as amended by Act Sec. 18001(a)(4))
Effective date. The provision on the application of the Cadillac tax is effective for years beginning after Dec. 31, 2016. (Act Sec. 18001(a)(7)(A))