Uncertainty is a latent variable. It is difficult to quantify however, if you are a small business owner and looked into alternatives to traditional group health insurance for your business over the last few years, you have no doubt experienced your fair share of elevated uncertainty.
For decades small businesses have been using medical reimbursement plans to reimburse employees for their own individual health insurance premiums. These arrangements are explicitly allowed under current tax code as well as prior IRS guidance. In 2002, the IRS published Notice 2002-45 that provided the blueprint for companies to reimburse employees tax-free through plans referred to as HRAs. These plans provided an alternative to traditional group health insurance that were vital for small businesses that needed to offer a health benefit in order to compete with more established companies. Small businesses often lack the human resources to take on the burden of administering group health insurance. Moreover, the rapidly changing small group market promises that significant time will be required each year to assess benefit options and sustainability as carriers enter and leave the market, costs escalate and employees discover the same or better coverage options on the individual market.
Regulatory Uncertainty for Small Business Benefits
The uncertainty began in June of 2010 when the federal government issued interim final regulations related to the lifetime and annual limit rules application to Health Reimbursement Arrangements (HRAs). While most HRAs had been exempted, the federal government requested comments regarding application of these rules to non-exempted HRAs. According to the interim regulations, the restriction on annual limits applied differently to certain account-based plans, especially where other rules applied to limit the benefits available.
The public comment period ended in August, 2010, and the comments overwhelmingly supported an exemption for all stand-alone HRAs. The small business community would have to await guidance on non-exempted HRAs for clarification on lifetime and annual limit rules application.
In September, 2013, three years after the comment period closed, and with barely three months before the new regulations went into effect, the long awaited guidance was issued jointly by the Department of the Treasury, Health and Human Services, and the Department of Labor. It contained a baffling regulatory overreach. The departments essentially stripped away the ability of small businesses to provide tax-advantaged reimbursements to employees for qualified medical expenses by applying the prohibition on annual or lifetime limits for essential health benefits to most stand-alone HRAs. Additionally, the guidance threatened to impose a tax of $100 per day per employee on companies that continued to administer non-compliant plans. Interestingly, the tax, codified in IRC 4980D, has been in the tax code since the mid-1990s however, it took on a new persona as an evil ACA tax leveraged at small businesses.
Over the last three years, I have worked with hundreds of small businesses, helping them identify, understand and navigate health insurance options for small businesses. The owners I worked with demonstrated a clear frustration with ambiguous, sub-regulatory IRS guidance and no clear consensus on an interpretation. The degree of confusion regarding what help small businesses could or could not provide to their employees for individual health insurance has not only been exasperating, it has led to businesses postponing benefits decisions and holding back the pace of their company’s growth.
Confusion intensified and vexation set in as some interpreted the guidance as a prohibition on reimbursing individual health insurance. Group health insurance brokerages quickly adopted this interpretation and leveraged it to persuade small business owners that group health insurance was the only risk-free health benefit option for small businesses. The media joined in, adding some sensationalism with the prospect of small businesses being assessed penalties of $100 per day per employee. Accountants and tax professionals, as a profession, did not have a consistent interpretation. Owners looking to these professionals for counsel were disappointed with a myriad of differing opinions. Moreover, looking for answers in the tax code was hopeless as the tax code had not changed. The IRC explicitly allowed for the tax-free reimbursement of all qualified health expenses, including health insurance premiums. The regulatory environment for small business owners was nebulous, at best.
Under these clouds of confusion, small business owners grappled with the need to offer competitive compensation packages that included health benefits, and the message they encountered, that anything other than traditional group health insurance was risky, or at least controversial.
New Legislation Could Reconfirm Benefit Options
Finally, it looks as if the fog is set to lift and regulatory clarity is on the horizon. Proposed legislation in the form of the Small Business Healthcare Relief Act has passed the House and looks set to pass the Senate. The legislation corrects the prior agency's’ regulatory overreach by clearly allowing small businesses to use pre-tax HRAs to financially assist their employees with the purchase of health coverage and related costs.
The most beneficial outcome of this legislation being enacted will not be the restoration of small businesses’ ability to give pre-tax dollars to employees for medical care. The real win is that for the first time since late 2013 small business owners can look to the law and determine what is allowed and what is not. Leaving small businesses to rely on sub-regulatory guidance issued by the IRS in the form of notices, which carry no regulatory authority, helped create an environment of regulatory uncertainty that disincentivizes small businesses from providing health benefits to their employees and hobbled small business growth by eliminating health benefit options that allowed them to compete with larger, more established firms.
Among the worries regulators had was the potential for HRAs to disincentivize the purchase of health insurance. Younger, healthier participants, the logic goes, would be less likely to purchase health insurance if they had access to a few thousand dollars in tax-free money for medical expenses. The SBHRA will require participants to verify minimum essential coverage before they are eligible for reimbursements. Another concern was the ability of individuals to qualify for health insurance subsidies when their company was providing access to tax-free reimbursement dollars. Under current regulations, only an employer-sponsored offer of affordable, minimum essential coverage disqualifies an individual from premium tax credits. The SBHRA requires coordination with premium tax credits, eliminating the potential of double benefits. The bill will also likely require a broader eligibility criteria than current regulations, which allow for narrower, job-based eligibility criteria.
Notice and reporting requirements are also established. The bill mandates that companies provide eligible employees with a written notice containing the amount of the employee’s permitted benefit. Additionally, the bill requires that employers report contributions to a reimbursement arrangement on their employees’ W-2 forms.
From 2010 to 2014 the number of micro businesses (10 or fewer employees) that offer health benefits dropped from 59% to 44%. Certainly much of the decline can be attributed to cost however, the lack of health insurance alternatives, a function of regulatory uncertainty has also contributed.
Once we have regulatory clarity, companies will be able to base benefit decisions on business based criteria, such as what type of benefit best meets their employees’ benefit expectations? A paradigm shift for those that found themselves paralyzed by compliance concerns. We might even expect to see a rebound in the number of micro businesses offering benefits as small business owners have clear choices to consider. If enacted, the Small Business Healthcare Relief Act of 2016 will result in more options for small businesses, which is what everyone wants.
What questions do you have about the impact of the SBHRA? Let us know in the comments section below.