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Small Business Employee Benefits and HR Blog

Why HRAs are Problematic Under the Affordable Care Act

HRAs and the Affordable Care ActHealth Reimbursement Arrangements (HRAs) have been one of the easiest ways for small businesses to offer employees a flexible, tax-advantaged health benefit that controls company costs. And yet, new Affordable Care Act (“Obamacare”) rules limited HRA use for plans beginning January 1, 2014.

There are, however, simpler, tax-advantaged options for companies unable to afford traditional group health insurance.

This article summarizes why the Affordable Care Act (ACA) changed HRAs and what to do if your company still offers one.

Health Reimbursement Arrangement 101 - What is it?

If you’re searching for HRAs in IRS tax code, you won’t find the acronym. Publication 969 and Notice 2002-45 are the most straightforward and easy to comprehend IRS publications related to HRAs (yes, the words IRS and easy were just put in the same sentence).

All kidding aside, these resources are fantastic. They confirm that HRAs:

  1. Are employer-funded (no employee salary reductions).

  2. Reimburse employees and their dependents for qualified medical expenses.

  3. Provide reimbursement up to a maximum dollar limit and unused amounts roll over year to year.

Pretty flexible. To top it all off, reimbursements are generally excludable from employees’ gross income under Internal Revenue Code Sections 106 and 105.

My guess is that a tax professional asked to summarize HRAs in one concise sentence would say the following: an HRA is a type of self-insured medical expense reimbursement plan.

The Affordable Care Act's New Rules for Group Health Plans

If you’re reading this article, you are likely involved with a business (run, work for, consult) that gives employees money for medical expenses like insurance premiums and/or doctor visits, copays, etc. Heck, your company might have even taken the time to draft formal, legal plan documents and called the plan an HRA to reap the tax benefits.

An employer that provides medical care for employees and/or their dependents, directly through insurance or indirectly through reimbursement, has created a group health plan. And all group health plans must comply with applicable group health plan requirements.

This is relevant because the ACA created new requirements (“Market Reforms”) for all group health plans that started on or after January 1, 2014. The IRS and Department of Labor have confirmed ad nauseum that these new requirements apply to all types of group health plans, including HRAs, health FSAs, and employer payment plans. Specifically, group health plans aren’t allowed to place limits on essential health benefits and must cover basic preventive healthcare services without cost-sharing. There are others, but these two are most relevant for sake of this article.

Employer consequences for non-compliance with these requirements (old or new) can be significant - up to $36,500 per employee in non-deductible excise taxes.

What Makes HRAs Problematic with the Affordable Care Act?

So, HRAs are a type of self-insured medical expense reimbursement plan that small employers use all the time, some formally and some informally.

The reason employers still using HRAs as an employee benefit option are at risk (one-person companies, you’re okay) is because HRAs, by their very definition, fail to meet new ACA group health plan requirements.

Since HRAs provide employees with reimbursement up to a maximum dollar limit for qualified medical expenses, it’s very likely, if not certain, that the plan is placing a limit on one or more essential health benefits and would fail a compliance test.

Further, HRAs that went undocumented or were documented post-2014 and did not include basic preventive healthcare service coverage are also likely to fail a compliance test.  

An Alternative Option to HRAs

If you’ve used an HRA in the past or are seeking a tax-advantaged alternative to group health insurance, consider a Healthcare Reimbursement Plan (HRP).

An HRP is a type of self-insured medical expense reimbursement plan (a group health plan) designed for individual health insurance and basic preventive healthcare reimbursement.

Structured correctly, an HRP complies with all applicable regulations, including new ACA group health plan requirements.

Conclusion

The Affordable Care Act has altered the HRA landscape for small businesses. Employers still using HRAs are likely operating a non-compliant plan and should consider transitioning to a compliant reimbursement plan to avoid hefty fines.

What questions do you have about HRAs and the Affordable Care Act? Leave a question or comment below.

The Comprehensive Guide to the Small Business HRA