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Small Businesses Can Now Compensate Employees Who Purchase Their Own Health Insurance

New, small employer ACA requirements effective for plans beginning after Dec. 31, 2016

President Barack Obama recently announced a small gift for small businesses as it relates to insurance. Title 18 of the new 21st Century Cures Act, signed by President Obama on Dec. 13, 2016, allows small employers the use of Health Reimbursement Arrangements (HRAs) to compensate employees who buy their own health insurance for themselves and their families.

Reimbursement Amounts

Maximum annual benefits for the individual are $4,950 or $10,000 a year for families. Employers are to report the total amount of benefits received on their employees’ W-2 forms, beginning with the 2017 calendar year. After 2016, the above dollar amounts are subject to annual cost-of-living increases.

Reimbursement Details

The reimbursements are for the cost of employee health insurance plans purchased through the Affordable Care Act (ACA) marketplace or on the individual market, effective after Dec. 31, 2016. Reimbursements only can be funded by the employer, and cannot include employee salary reduction contributions. The employee’s out-of-pocket plan must provide for the payment or reimbursement of medical care expenses that are incurred by the employee or the employee’s family members and the employee must provide proof of health coverage to their employer. HRAs must be offered on the same terms to all eligible employees, but employers may exclude from eligibility employees who have not completed 90 days of service, have not reached age 25, part-time or seasonal employees, employees included in a collective bargaining agreement and employees who are non-resident aliens who have no earned income derived from sources within the U.S.

Notice Requirements

Small employers must give an annual notice to eligible employees:

  • at least 90 days before the start of the year, or,
  • at least 90 days before the employee’s initial eligibility date, or
  • no more than 90 days after the legislative enactment of the 21st Century Cures Act; whichever is later.

The annual HRA notice must:

  1. state the amount of the employee’s permitted benefits
  2. educate the employee on how to disclose the reimbursement amount to any health insurance exchange if an employee chooses to apply for the premium assistance tax credit
  3. warn about taxes that may be charged if the employee does not have minimum essential coverage each month
  4. remind the employee that the HRA may be included in Gross income

If the business fails to follow the above requirements, it will be subject to a $50 per-employee per-incident penalty, up to $2,500 per calendar year, unless the failures were due to reasonable cause and not willful neglect.

This HRA Isn’t for Every Employer

The 21st Century Cures Act created a new type of HRA called the “qualified small employer HRA” (SEHRA). The IRS code does not consider SEHRAs as group health plans, therefore making them unqualified for the excise tax levied on group health plans that don’t meet the ACA market reform requirements. If your company is considered an applicable large employer and/or has at least 50 full-time or full-time equivalent employees then you are not eligible to provide a SEHRA.  Additionally, you cannot provide an SEHRA if you offer a group health plan to any of your employees.

DISCLAIMER: The information provided in this blog is for general informational purposes only. Accordingly, Paycom and the writer of the above content do not warrant the completeness or accuracy of the above information. It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other professional services.