In a Federal Tax Update from Checkpoint Newsstand by Thomson Reuters, they break down the details of the 21st Century Cures Act. Part of this law is replealing the penalty assessed against small employers (less than 50 employees) who offer health insurance reimbursements.
The Senate on December 7 passed, by a 94-5 vote, H.R. 34, the "21st Century Cures Act" (the Act) which was passed by the House of Representatives on November 30 by a 392-26 margin. The Act covers a wide-ranging group of nontax health subjects and also includes a provision exempting small employer health reimbursement arrangements (HRAs) from the Affordable Care Act (ACA)'s group plan rules. The Act is expected to be signed into law by President Obama.
Prior law. HRAs typically consist of a promise by an employer to reimburse medical expenses (as defined in Code Sec. 213(d)) for a year up to a certain amount, with unused amounts available to reimburse medical expenses in future years. The reimbursement is excludable from the employee's income. HRAs generally are considered to be group health plans for purposes of the Code, Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act (PHS Act), provisions of which were incorporated into the Code by the ACA.
The ACA contains certain market reforms that generally apply to group health plans, including the following provisions:
- PHS Act § 2711 which provides in part that a group health plan (or a health insurance issuer offering group health insurance coverage) may not establish any annual limit on the dollar amount of benefits for any individual.
- PHS Act § 2713 which requires non-grandfathered group health plans (or health insurance issuers offering group health insurance plans) to provide certain preventive services without imposing any cost-sharing requirements for these services (the preventive services requirements).
IRS distinguishes between employer-funded HRAs that are "integrated" with other coverage as part of a group health plan (which can meet the PHS Act § 2711 annual limit rules) and HRAs that are not so integrated, i.e., "stand-alone" HRAs (which cannot meet the PHS Act § 2711 lifetime and annual limit rules). Similarly, IRS says a stand-alone HRA would not meet the PHS Act § 2713 preventive services requirement.
Code Sec. 4980D imposes an excise tax on any failure of a group health plan to meet the requirements of Chapter 100 ("Group Health Plan Requirements") of the Code.
The ACA's complex employer-shared responsibility provisions apply only to applicable large employers (ALEs), defined for 2016 as employers that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding year.
Employers, whether or not they are ALEs, are subject to the Code Sec. 4980D excise tax if they maintain group health plans that don't meet the ACA market reform requirements. Notice 2015-17, 2015-10 IRB 845, provided that the Code Sec. 4980D excise tax will not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for individual health policy premiums or Medicare part B or Part D premiums
- For 2014, for employers that are not ALEs for 2014, and
- For January 1 through June 30, 2015, for employers that are not ALEs for 2015.
Thus, under prior law, after June 30, 2015, small employers that maintain a stand-alone HRA may be liable for the Code Sec. 4980D excise tax.
New law.Code Sec. 4980D relief for small employers. Effective generally for tax years beginning after Dec. 31, 2016, a qualified small employer HRA is not treated as a group health plan for income tax purposes (except for Code Sec. 4980I(f)(4), as amended by the Act, and notwithstanding any other provision of the Code) (Code Sec. 9831(d)(1), as amended by Act Sec. 18001(a)) There are similar exceptions for ERISA and PHS Act purposes. (Act Sec. 18001(b) and (c), effective for plan years beginning after Dec. 31, 2016)
RIA observation: Thus, under the Act, a qualified small employer HRA will not face the Code Sec. 4980D excise tax levied on group health plans that don't meet the ACA market reform requirements.
Transition rule: Under Act Sec. 18001(a)(7)(b), the relief under Notice 2015-17, is treated as applying to any plan year beginning on or before Dec. 31, 2016.
RIA observation: Thus, for plan years beginning on or before Dec. 31, 2016, HRAs maintained by employers that are not ALEs – that is, small employers with fewer than 50 employees – won't face the Code Sec. 4980D excise tax even if the plans are not qualified small employer HRAs.
Qualified small employer HRA defined. A qualified small employer HRA is one that meets all of the following requirements:
- It is maintained by an eligible employer. (Code Sec. 9831(d)(2)(A)(ii)) An eligible employer is an employer that is not an ALE as defined in Code Sec. 4980H(c)(2) – i.e., it employs fewer than 50 employees — and does not offer a group health plan to any of its employees. (Code Sec. 9831(d)(3)(B))
- It is provided on the same terms to all eligible employees. (Code Sec. 9831(d)(2)(A)(ii)) An eligible employee is any employee of an eligible employer, except that the arrangement may exclude from consideration employees who haven't completed 90 days of service, employees who haven't attained age 25, part-time or seasonal workers, employees covered in a collective bargaining unit, and certain nonresident aliens. (Code Sec. 9831(d)(3)(A))
- It is funded solely by an eligible employer, and no salary reduction contributions may be made under the HRA. (Code Sec. 9831(d)(2)(B)(i))
- It 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 Sec. 213(d)) incurred by the eligible employee or the eligible employee's family members (as determined under the HRA's terms) (Code Sec. 9831(d)(2)(B)(ii)) and
- The amount of payments and reimbursements do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee). (Code Sec. 9831(d)(2)(B)(iii)) For any year beginning after 2016, the above dollar amounts are subject to cost of living increases. (Code Sec. 9831(d)(2)(D)(ii)) For employees who are covered by a qualified arrangement for less than an entire year, the above dollar amounts are prorated.Code Sec. 9831(d)(2)(D)(i))
An arrangement will not fail to be treated as provided on the same terms to each eligible employee merely because the employee's permitted benefit under such arrangement varies in accordance with the variation in the price of an insurance policy in the relevant individual health insurance market based on—
- The age of the eligible employee (and, in the case of an arrangement which covers medical expenses of the eligible employee's family members, the age of such family members), or
- The number of family members of the eligible employee the medical expenses of which are covered under such arrangement. (Code Sec. 9831(d)(2)(C))
Employer reporting requirements. For years beginning after Dec. 31, 2016, an employer funding a qualified arrangement for any year must, not later than 90 days before the beginning of such year (or, in the case of an employee who is not eligible to participate in the arrangement as of the beginning of such year, the date on which such employee is first so eligible), provide a written notice to each eligible employee which includes
- A statement of the amount of the employee's permitted benefit under the arrangement for the year;
- A statement that the eligible employee should provide the information described in clause (i) to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit;
- A statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax under Code Sec. 5000A for such month, and reimbursements under the arrangement may be includible in gross income. (Code Sec. 9831(d)(4))
The term "permitted benefit" means, with respect to any eligible employee, the maximum dollar amount of payments and reimbursements which may be made under the terms of the qualified arrangement for the year with respect to such employee. (Code Sec. 9831(d)(3)(C))
For calendar years that begin after Dec. 31, 2016, employers also have to report contributions to a qualified arrangement on their employees' W-2s. (Code Sec. 6051(a)(15))
Coordination with other rules. For purposes of Code Sec. 105 (Amounts received under accident and health plans) and Code Sec. 106 (Contributions by employer to accident and health plans), payments or reimbursements from a qualified plan aren't treated as paid or reimbursed under employer-provided coverage for medical expenses under an accident or health plan if, for the month in which such medical care is provided, the individual does not have "minimum essential coverage" within the meaning of Code Sec. 5000A(f). (Code Sec. 106(g))
For any month that an employee is provided affordable individual health insurance coverage under a qualified arrangement, he is not eligible for a premium assistance tax credit under Code Sec. 36B. (Code Sec. 36B(c)(4)(A)) The Act sets out a definition for "affordable" for this purpose. (Code Sec. 36B(c)(4)(C))