Congress enacts law allowing HRAs under the Affordable Care Act

By Alistair M. Nevius, J.D.

The Senate passed the 21st Century Cures Act, H.R. 34, on Wednesday, by a vote of 94–5, and the bill now goes to President Barack Obama for his signature. Among other things, the bill will allow certain small businesses to use health reimbursement arrangements (HRAs) without incurring penalties under the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. The bill amends Sec. 9831 to add an exception for qualified small employer HRAs. [Update: The president signed the bill into law on Dec. 13, 2016.]

In Notices 2013-54 and 2015-17, the IRS had concluded that HRA plans are group health plans 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. 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. However, the IRS had provided transition relief from the Sec. 4980D penalty.

The 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).

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 and House Ways and Means Committees 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.

 Alistair Nevius ( is the JofA’s editor-in-chief, tax.


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