Compensation & Benefits Alert - December 2016

December 2016

President Obama Signs Bill that Eliminates the ACA Penalty on Certain Health Care Premiums Reimbursed to Employees


Summary

On December 13, 2016, President Obama signed the 21st Century Cures Act, which allows certain small employers to establish a new type of health reimbursement arrangement that reimburses for health insurance premiums without exposure to the $100 dollar per day penalty under the Affordable Care Act (“ACA”).  Under these new rules, small business owners are permitted to compensate employees for medical visits or the cost of individual insurance premiums up to an annual limit of $4,950 for individuals, or $10,000 for families.  These reimbursements are also excludible from the employee’s gross income.  

An employer is eligible to establish a small employer health reimbursement arrangement if that employer (i) is not subject to the employer mandate under the Affordable Care Act (i.e., less than 50 full time employees or full time equivalents) and (ii) does not offer a group health plan to any employees.

These rules are effective for plan years beginning after December 31, 2016, with retroactive transition relief from penalties to small employers who continued to reimburse employees for medical expenses, including premiums for individual health insurance since June 30, 2015, when the IRS Notice 2015-17 relief from the $100 day penalty under IRC Section 4980D expired.  This means that small employers who have continued to provide such reimbursements will not be subject to the potential penalties.


Background and Discussion

After the passage of the ACA, the IRS released Notice 2013-54 and 2015-17, describing health reimbursement arrangements as employer payment plans; therefore, they are group health plans within the meaning of Code Section 5000(b)(1). Group health plans are subject to the ACA’s market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Failure to comply with the ACA’s market reforms triggers an excise tax under Code Section 4980D, up to $100 per day for each employee.

Section 18001 of the 21st Century Cures Act amends Code Section 9831 by adding subsection (d), “Exception for Qualified Small Employer Health Reimbursement Arrangements (QHRA).” These QHRAs are exempt from the ACA market reforms and its penalties, provided the following:
  1. The arrangement is offered to all employees on the same terms and waiting periods may not exceed ninety (90) days;

  2. It is funded solely by an eligible employer and no salary reduction contributions may be made under the arrangement;

  3. The arrangement 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 § 213(d)) incurred by the eligible employee or the eligible employee’s family members (as determined under the terms of the arrangement); and

  4. The amount of payments and reimbursements for any year do not exceed $4,950 per employee, or $10,000, in the case of arrangements providing payments or reimbursements for family members of the employee, as adjusted for cost of living and partial years.

Additionally, the employer must provide a notice of eligibility and terms to each eligible employee, any employee not excluded by the terms of the arrangement.  Furthermore, the employer must report the total amount of the permitted benefit received under the qualified small employer health reimbursement arrangement on the employee’s Form W-2 for the year. Any employer that fails to provide any employee with a written notice of eligibility and terms is subject to a $50 penalty per employee, with the maximum penalty for all failures not exceeding $2,500 in any calendar year.

These rules are applicable for all taxable years beginning after December 31, 2016.  The transition relief under IRS Notice 2015-17, as discussed above, shall be treated as applying to any plan year beginning on or before December 31, 2016.


BDO Insights

This bill effectively allows the premium reimbursement by small employers to be integrated with the individual’s health care policy to determine whether an annual limit was placed on the benefit provided by the employer. There is no change for Applicable Large Employers.  Therefore, Applicable Large Employers are still prohibited from reimbursing premiums purchased on the individual health care market.  
 



For more information please contact one of the following practice leaders: 
 
Joan Vines
Managing Director, National Tax Office
Compensation & Benefits 
  Carl Toppin
STS GES Senior Manager,
Compensation & Benefits
 

 
Kim Flett
Managing Director, Tax
Compensation & Benefits 
  Peter Klinger
Principal, National Tax - Compensation & Benefits