Affordable Care Act Update

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Affordable Care Act (ACA) Update

Health Reimbursement Arrangements Get a Second Life

By: Dave Reyes, CPA, CEBS, Shareholder

Affordable Care Act (ACA) Update

The Affordable Care Act (ACA) made sweeping changes to how employers provide health coverage for their employees. Health Reimbursement Arrangements (HRA’s) were significantly impacted by the ACA. Prior to the ACA, many small employers would use an HRA to not only reimburse employees for their out of pocket medical expenses, but they would also reimburse them their premiums for individually purchased health insurance coverage.

For most employers the ACA basically put an end to stand alone HRA accounts beginning in 2014. The reason being is the Federal government did not want an employer to drop their group medical coverage and move their employee’s coverage to the public exchanges. After the Affordable Care Act changes, any employer continuing to use an improper HRA could be subject to a $100/day per employee penalty tax. This severe penalty essentially put an end to stand alone HRA’s.

HRA’s received a new life on December 13, 2016 with the passage of the 21st Century Cures Act. This new law included a provision for creating a new type of HRA call a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), effective January 1, 2017. These new HRA’s allow small employers the opportunity do what the ACA originally intended to prevent. A QSEHRA may reimburse employees for qualified medical expenses, but more importantly they may also reimburse employee’s individual health insurance premiums. This change allows these reimbursements to be tax free, and overturns the ACA provisions which originally prohibited HRA’s under the ACA.

There are two specific requirements which must be satisfied in order for an employer to be eligible to sponsor a QSEHRA:

  1. The employer must have fewer than 50 full-time or equivalent employees
  2. The employer cannot offer any group health plan for any of their employees

In order to qualify as a QSEHRA, the plan must meet certain requirements including the following:

  1. Only employer contributions are allowed, no employee contributions are permitted
  2. Calendar year reimbursements must not exceed $4,950 for employee only coverage. For coverage which includes family members, reimbursements are increased to $10,000
    The HRA benefits must be provided equally for all eligible employees
  3. All employees must be eligible. An employer may exclude employees with less than 90 days of service, employees under the age of 25, part-time or seasonal employees, and union employees

There are a few other annual Affordable Care Act requirements an employer must follow. The employer must provide timely notification of the plan to employees before the start of each calendar year, and tax-free reimbursements from the plan must be reported on the employees W-2.

If you are an employer with less than 50 employees, and you think a QSEHRA might make sense for you, or if you have any other questions regarding the Affordable Care Act, we would be happy to discuss any questions you may have. Contact Dave Reyes, a shareholder in our Tax Group, at 216-344-5233 or