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21st Century Cures Act Establishes Small Employer HRAs

By MarksNelson on December 15, 2016 in Articles, Tax

President Obama signed into law the 21st Century Cures Act (the Act) on December 13th which allows small employers to provide Health Reimbursement Arrangements (HRAs) for their employees without facing penalties for failing to satisfy certain Affordable Care Act (ACA) requirements.  Furthermore, the Act retroactively grants penalty relief for plan years beginning on or before December 31, 2016.

Starting in 2017, qualified small employer HRAs are not treated as a group health plan for income tax purposes.  Thus, they will not face the excise tax penalties levied on group health plans that don’t meet the ACA requirements.  Qualified small employer HRAs must satisfy the following requirements:

  • It must be maintained by an employer who has less than 50 employees and does not offer a group health plan to any of its employees.
  • It must be provided on the same terms to all eligible employees. An eligible employee is any employee, except those with fewer than 90 days of service, part-time or seasonal workers, employees under age 25, those covered by collective bargaining, and certain nonresident aliens.
  • It must be funded solely by the employer with no salary reduction.
  • It must provide for the payment, or reimbursement, of an eligible expense for medical care incurred by the employee or the employee’s family members.
  • The amount of payments and reimbursements are capped at $4,950 for individuals ($10,000 for arrangements that also provide for payments for family members). Dollar limits are prorated for employees who are covered for less than the entire year.

Employers funding a qualified HRA for any year must, not later than 90 days before the beginning of such year, provide a written notice to each eligible employee which includes (i) a statement of the amount of the employee’s permitted benefit under the arrangement for the year; (ii) 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; (iii) a statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax under the individual mandate for such month, and reimbursements under the arrangement may be includible in gross income.  The Act provides transitional relief, however, for failure to provide this written notice as long as the notice is provided within 90 days from the date the President signed the bill.

Failure to provide the required notice, unless such failure is shown to be due to reasonable cause, will subject the employer to a $50 per-employee, per-incident-of-failure penalty, up to a $2,500 calendar year maximum for all such failures.

Employers must also report the total amount of permitted benefit for the year under a qualified arrangement on the employee’s Form W-2.

Please contact your MarksNelson professional if you have any questions regarding this law change.

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MarksNelsonView all posts by MarksNelson
MarksNelson LLC works with clients to help safeguard and grow their businesses. Our ultimate goal is to help our clients to Move Forward. The firm provides Assurance, Accounting Services and Business Advisory, Business Valuation, Consulting, Cost Segregation, Employee Benefit Plan Audits, Litigation Support, Forensic Accounting, International Tax, State and Local Tax and Tax planning, advisory and compliance services. MarksNelson is a member of The Leading Edge Alliance, the second-largest international professional association of independently owned accounting and consulting firms, serving clients who need additional resources on a national or international level. MarksNelson has significant accounting and business advisory experience in the auto dealership, construction, insurance, manufacturing, distribution and real estate sectors. The firm was named among the 2014 Best Accounting Firms for Leadership Equity by the 2014 Accounting MOVE Project for its dedication to gender equity.