Over the last several months, the bipartisan Small Business Healthcare Relief Act (SBHRA) has begun to pick up speed with increased coverage and a number of co-sponsors. If passed, the SBHRA will ensure small business owners can use Health Reimbursement Arrangements to assist employees with out-of-pocket health insurance and healthcare costs.
Introduced on June 25, 2015, the Small Business Healthcare Relief Act has been referred to the respective Congressional Committees for consideration and boast nearly 100 co-sponsors in both the House and the Senate. If you are interested in learning more about the bill, check out the following FAQs.
1. What is a Health Reimbursement Arrangement (HRA)?
An HRA is an arrangement that is funded solely by an employer and that reimburses an employee for health care expenses, such as health insurance premiums, co-pays, deductibles, and other medical expenses allowed under Internal Revenue Code (IRC) Section 213(d) incurred by the employee and his/her spouse or dependents. The value of an HRA is determined by the employer. Like premiums paid under employer-provided coverage, reimbursements made under an HRA are tax-free under (as defined under IRC Section 105).
There are two types of HRAs- integrated and stand-alone. In general, to be considered an integrated HRA, an employee receiving employer contributions through an HRA must be enrolled in a group health plan offered by either his/her employer or the employee's spouse's employer. A stand-alone HRA is not connected to any offer of coverage and can be used to reimburse allowable medical expenses, regardless of whether the employee is enrolled in a health insurance plan.
Under Notice 2013-54, the IRS and DOL allowed the continuance of integrated HRAs and standalone retiree HRAs. However, the Notice prohibited the continuation of standalone HRAs for non-retirees.
2. Why have HRAs been prohibited by the IRS?
According to the IRS and DOL, HRAs are generally considered to be group health plans, and therefore, subject to the market reforms that apply to group health plans that were enacted under the Affordable Care Act (ACA), including the prohibition against annual limits on essential benefits and the requirement to provide preventive services with no cost sharing. Since HRAs are not traditional health insurance, but rather a means to obtain insurance on the individual market and/or offset related health care expenses, the IRS and DOL, under Notice 2013-54, argued that these accounts did not meet the group health plan requirements. If an employer continues to offer a plan that is in violation of the group health plan requirements, and excise tax of $100 per day, per employee is accessed.
Prior to the (ACA), HRAs had few requirements other than requiring all reimbursable expense to be qualified medical expenses defined under IRC Sec. 213(d).
3. How does the Small Business Healthcare Relief Act (SBHRA) alter and/or comply with the IRS guidance?
Removes HRAs from the definition of group health plan only for employers with fewer than 50 employees, and therefore not subject to the employer mandate. This ensures that employers are not subject to the excise tax for failure to comply with the group health plan requirements.
Allows HRAs to reimburse employees who purchase health insurance on the individual market, and to reimburse for related out-of-pocket healthcare expenses allowed under IRC sec. 213 d) if the employee is enrolled in a qualified health plan.
Retains IRS's requirement that employees maintain health insurance as a prerequisite to using the HRA. Maintains prohibition that employee cannot use both HRA and premium tax credits.
4. Could employers use Health Reimbursement Arrangements (HRA) prior to implementation of the Affordable Care Act (ACA)?
Yes. While the vast majority of employers, irrespective of size, offered traditional self-insured or group health plan, a small minority of small employers provided their employees and/or retirees with HRAs because of the overall administrative and financial burden of providing traditional health insurance. These arrangements also offered employers flexibility and employees choice.
5. Who may be allowed to use these HRA accounts?
Employers: The bill only allows HRAs to be offered by employers with fewer than 50 employees, and therefore not subject to the employer mandate. Under the ACA, employers with fewer than 50 employers are not required to provide health coverage. However, many were offering and would like to continue offering their employees with financial assistance toward the purchase of health coverage.
Employees: The bill allows employees to use HRAs only if they have and maintain coverage through a qualified health plan, including Medicare.
6. Are employees enrolled in these HRA accounts eligible for premium tax credits on the exchange?
Yes, according to the current legislation, employees with a Small Business HRA may access premium tax credits. However, it is important to note the monthly HRA contributions will be included in an employee's income calculations for determining his or her tax credit eligibility and amount. Additionally, if an employee is eligible for a premium tax credit, the amount of the credit will be reduced dollar-for-dollar by the monthly HRA amount.
7. What happens if an employee uses the HRA, but is not enrolled in a qualified health plan, or drops coverage at some point during the year?
The bill requires employers to verify and employees to provide annually proof of coverage upon enrollment in the HRA. Employers are also required to provide notice to employees regarding the eligibility requirements for enrolling and using an HRA. If an employee drops coverage during the year for reasons that do not exempt him/her from the individual mandate, and continues to utilize the HRA, the HRA becomes taxable to the employee on a prorated basis.
If an employee drops coverage during the first quarter of the year, 75% of the HRA becomes taxable
If an employee drops coverage during the second quarter of the year, 50% of the HRA becomes taxable
If an employee drops coverage during the third quarter of the year, 25% of the HRA becomes taxable
If an employee drops coverage during the fourth quarter of the year, the employee is safe-harbored and the HRA remains tax-free. This aligns with the individual mandate requirement, which is based on nine months of coverage.
8. Are employer contributions to HRAs subject to the excise tax on high-cost plans (i.e., the Cadillac Tax)?
Yes. Under the bill, employer contributions to HRAs are subject to the excise tax. However, employee contributions in the form of out-of-pocket expenses are not subject to the excise tax. For example, if an employer offers an HRA in the amount of $3,000 and the employee purchases an insurance plan with a total cost of $3,500. The employee's out-of-pocket costs of $500 are not included in the amounts subject to the excise tax.
9. What impact will this bill have on the small group market?
According to the U.S. Department of Health and Human Services (HHS), only 32 percent of businesses with fewer than 50 employees currently offer health insurance. The remaining businesses were either offering HRAs or choose/chose not to offer any health benefits to their employees.
Recognizing the administrative and financial challenges small employers face, the ACA created the Small Business Health Options Program (SHOP) to provide a marketplace for businesses to find affordable health care for their employees. Moreover, the ACA created small business tax credits to help offset the cost of providing health insurance to employees. However, these tax credits are temporary (two years) and most small businesses are not eligible for the credits because of limitations on wages and employee size (fewer than 10-25 full-time employees who are paid an average of$25,000-$50,000 or less). Since the implementation of the ACA, the SHOP exchange has had some challenges, and, as a result, enrollment and participation has been and continues to be low and not a viable option for most small employers. Moreover, a small number of states have chosen to operate a SHOP Marketplace.
The small group is also experiencing some challenges that have resulted in instability and increased costs (i.e., composite rating). The ACA also recognized the current and future challenges of the small group market and offered states the option of merging the individual and small group markets.
As the economy comes out of the recession, shortages of skilled labor in all sectors of the economy require employers to be competitive. Employers with just under 50 employees are competing with employers with just over 50 employees (and required to offer a traditional health plan). Therefore, they have to offer robust and consistent health benefits to attract and retain good talent. If employers are currently offering coverage, they are likely to continue offering coverage. Those employers that decide to eliminate health benefits without taking into consideration the impact on their employees, although entitled to do without penalty, would do so callously. Should an employer decide to no longer offer traditional insurance benefits, offering an HRA ensures continuity of coverage, employer participation, employee choice and portability.
Editor's Note: This article was published in March 2016. For the most current briefing and status of the legislation, download the PDF eBook (click here).