When tax season rolls around each year, CPAs and tax professionals are tasked with explaining intricate details about health insurance markets and regulations to their clients—in addition to offering much-needed guidance on what’s best financially for both employers and individual taxpayers.
This role has expanded since the Affordable Care Act (ACA) and the American Rescue Plan have created new tax opportunities for both organizations and individuals in the United States—especially as it relates to health reimbursement arrangements (HRAs).
In this article, we’ll cover everything a CPA or tax professional needs to know about the individual market and HRAs to offer informed guidance to their clients.
Health reimbursement arrangements are becoming more popular
The idea behind an HRA is that an organization gives each employee a fixed dollar allowance to spend on qualifying medical expenses—including individual health insurance—and reimburses them up to that allowance amount each month.
Given the flexibility and personalized nature of this reimbursement model, interest in HRAs is quickly growing among organizations in the U.S.
For example, the Society for Human Resource Management reports nearly a quarter of wholesale and retail employers surveyed are planning to offer, or are considering offering, an individual coverage HRA (ICHRA) in 2022 or later. The survey also found that one in three CFOs from a variety of industries plan on offering an ICHRA to their employees.
Need-to-knows about HRA compliance
Because of this shift toward healthcare reimbursement models, CPAs must be familiar with how individual health insurance reimbursement plans are set up, administered, and reported.
CPAs should also be knowledgeable about comparing the tax and financial advantages of healthcare reimbursement plans compared to traditional employer-sponsored group health insurance.
For example, employers can reimburse health expenses with money that is free of payroll taxes for both the employer and employee. Reimbursements are also free of income tax for the employee as long they have health insurance that provides minimum essential coverage (MEC).
To qualify for tax benefits, an HRA must meet the following requirements:
- The HRA is 100% employer-funded (employees can’t contribute)
- The organization doesn’t fund its contribution through wage deductions—even if the employee agrees to it
- Employees have MEC to get reimbursements free of income tax
- If employees don’t have MEC, they must report reimbursements as taxable income at the end of the year
- Formal plan documents must define qualified medical expenses
Need-to-knows about the individual market
As interest in the reimbursement model increases, so does the number of employees shopping for health insurance on the individual market.
That’s why it’s crucial for CPAs to understand how individual health insurance plans are structured. They need to be able to advise their clients about which plans are compliant with current regulations and meet MEC.
Common acceptable coverage types that work with an HRA include:
- Any individual health coverage insurance policy purchased on the open market, the ACA healthcare marketplace public exchange, or on a private exchange
- All of these plans will work so long as they cover the necessary essential health benefits with no annual or lifetime limits set forth by the ACA as MEC
- Medicare Part A and B, or Part C
- Part B coverage by itself doesn’t qualify
- Most student health insurance policies
Common unacceptable coverage types that don’t work with an HRA include:
- Association health plans
- Healthcare sharing ministries
- Short-term limited duration insurance
It’s important to remember that a qualified small employer HRA (QSEHRA) is available to employees regardless of their insurance status. However, in order to receive reimbursements tax-free, an employee must have MEC. While the ICHRA has unique insurance requirements, any type of MEC counts for a QSEHRA.
The only type of HRA where employees don’t purchase insurance on the individual market is the group coverage HRA (GCHRA). In this case, employees participate in both an HRA and their employer’s group insurance plan to get their medical expenses covered.
There have been no recent changes to the tax code with regard to Section 105 medical reimbursement plans, however, the ACA has clarified that benefit plans like an HRA are considered “group health plans” and are subject to market reforms.
Not all plans meet these market reforms, so it's essential that CPAs are able to articulate how each plan is regulated.
Need-to-knows about organization size regulations
The ACA doesn’t apply equally to every organization, and specific regulations and penalties will differ for each organization depending on its size (based on the total number of full-time-equivalent workers) as well as its annual revenue.
For example, the employer mandate issues a penalty of $2,700 (for 2021) per full-time employee, minus the first 30, if the employer fails to offer MEC to 95% of its full-time employees and their dependents, and any full-time employee obtains coverage on the exchange.
Let’s say an employer with 50 employees doesn’t offer health insurance to its full-time employees and their dependents. If at least one full-time employee decides to go out and purchase tax-subsidized health insurance on their own, the employer’s penalty in 2021 will be $54,000 (50 - 30 x $2,700).
For some organizations, the cost of providing group health plans may be more than the penalty for not providing it (or the penalty plus the cost of reimbursing employees' premiums), so CPAs must be prepared to help organizations make this calculation.
Need-to-knows about premium tax credits
The American Rescue Plan also changed who qualifies for premium tax credits—changes that are set to last through 2022. Those who are newly qualified will have some new steps to tackle when filing their taxes, and will undoubtedly have questions for their CPAs.
As of April 2021, all Americans who purchase health insurance under the federal exchanges or state-run markets will pay no more than 8.5% of their household income.
However, you aren’t able to collect a full premium tax credit and use an HRA allowance at the same time. With the QSEHRA, employees who qualify for a premium tax credit will reduce their tax credit, dollar-for-dollar, by the amount of their QSEHRA allowance.
So if an employee with a $200 QSEHRA allowance qualified for a $300 tax credit, they would simply reduce their tax credit by $200 and have $100 remaining.
The ICHRA, on the other hand, doesn’t allow for this reduction. Instead, employees must either waive their premium tax credit so they can participate in the ICHRA, or, if their ICHRA allowance is considered unaffordable, they can opt-out of the ICHRA and collect their full premium tax credit.
As a CPA or tax professional, health insurance and HRAs are an important subject to stay informed on to make sure you’re aware of changes in regulations and penalties. As you stay up-to-date, you’ll be equipped to protect your clients from unnecessary fines and help them stay compliant.
This article was originally published on February 17, 2016. It was last updated April 23, 2021.