Congress authorizes new small business HRAs

Popular employer arrangements to reimburse medical expenses had been penalized by the Affordable Care Act.
By Alistair Nevius, J.D.

The 21st Century Cures Act, P.L. 114-255, reinstated the ability of certain small businesses to use health reimbursement arrangements (HRAs) and employer payment plans without incurring penalties under the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. The Cures Act amended Sec. 9831 to add an exception from the penalty rules for qualified small employer HRAs. 

In Notices 2013-54 and 2015-17, the IRS had concluded that, because they impose an annual limit on the dollar value of health benefits for particular individuals, HRAs and employer payment plans are group health plans (if they have at least two participants who are current employees) that fail to comply with the market reforms that apply to group health plans under PPACA and are therefore subject to the excise tax in Sec. 4980D (for more, see "Tax Practice Corner: Health Reform Prohibits Most Reimbursement Plans," JofA, Sept. 2015). Sec. 4980D imposes an excise tax of $100 per day per affected participant on health insurance employer payment plans that do not comply with the market reforms.

The Cures Act overrules the IRS position by defining "group health plan" as not including "any qualified small employer health reimbursement arrangement." Under the act, a qualified small employer HRA must be funded solely by an eligible employer, and there can be no salary reduction contributions under the arrangement. The HRA must provide for the payment of an eligible employee's expenses for medical care (as defined in Sec. 213(d)) that are incurred by the eligible employee or the eligible employee's family members. Finally, the amount of payments and reimbursements under the plan for any year cannot exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee). Those amounts are adjusted for inflation for years after 2016.

To be a qualified small employer HRA, the arrangement must be provided on the same terms to all eligible employees, although the act allows benefits under the arrangement to vary based on age and family-size variations in the price of an insurance policy in the relevant individual health insurance market.

To be eligible to offer a qualified small business HRA, the employer must not be an applicable large employer, as defined in Sec. 4980H(c)(2), and must not offer a group health plan to any of its employees.

The act coordinates the new exclusion with the Sec. 36B health insurance premium credit to provide that a qualified small business HRA can provide "affordable coverage," and that a "coverage month" does not include a month in which an employee receives affordable coverage under a qualified small business HRA.

The new rules apply to years beginning after Dec. 31, 2016.

In a letter to the chairs and ranking members of the Senate Finance Committee and House Ways and Means Committee on June 17, 2015, the AICPA had urged Congress to enact legislation that would allow businesses to continue to provide employer payment plans to their employees, partners, more-than-2% shareholder-employees of S corporations, and sole proprietors.

  • 21st Century Cures Act, P.L. 114-255, Section 18001(a)(1)

—By Alistair Nevius, J.D., the JofA's editor-in-chief, tax.


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