Employers can use Health Reimbursement Arrangements (HRAs), Employer Payment Plans, and Flexible Spending Accounts (FSAs) to save money on healthcare.
- We take a look at healthcare arrangements to find out how they can benefits employers and employees alike.
- We will also look at how they affect employer and employee taxes and penalties. It’s important to understand the implication of each arrangement to avoid potential fees.
NOTE: We have done our best to compile an overview of employer options under the ACA. However, nothing on the site should be taken as professional tax or legal advice.
IMPORTANT UPDATE: Since this article was written, a fix for small business HRAs was put in place via the 21st Century Cures Act of 2016 under President Obama. As of March 13, 2017 employers began to be able to offer Small Business HRAs called Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). These are Affordable Care Act-compliant health coverage plans for businesses with fewer than 50 full-time-equivalent (FTE) employees. Learn more about QSEHRAs.
Employer Health Plan Reimbursement Options Overview
Navigating Health Reimbursement Arrangements, Employer Payment Plans, and Flexible Spending Accounts is easy and recommended if you offer a group health plan as an employer. If you don’t offer a group health plan there are lots of considerations to take into account, and you should read what we have to say below carefully. If your business qualifies to use ObamaCare’s SHOP, consider saving yourself a headache and applying for the SHOP today.
Group Plans, Individual Plans, and Health Sharing Arrangements
The general rule of thumb is that employers must offer group plans and not reimburse employees for individual non-group coverage in regards to “offering health insurance”. This avoids employees using Marketplace tax credits while employers also get the tax benefits for offering health coverage.
There are lots of details, additional guidance, exemptions for certain employers, and a really big fee (excise tax) for getting it wrong. But luckily these details only apply to employers who don’t offer group plans and the fee is only levied on those who have 50 or more full-time equivalent employees.
Under the ACA you can offer:
- Group plans from the SHOP marketplace or through a off-marketplace insurer
- And certain types of reimbursement plans (see below).
- Employer with over 50 FTE need to offer a group plan.
- Employers with less than 2 employees can offer whatever they want.
- Employers with less than 50 FTE should look into group plans first, but can consider an HRP (which is like an HRA with special rules).
Under the ACA you can still offer these types of HRAs:
Integrated HRA – An HRA linked to a group plan.
Retiree-Only HRA – Retiree-only HRAs are exempt from the Market Reforms.
One-Person Stand-Alone HRA – One-person stand-alone HRAs are exempt from the Market Reforms. (one employee plus business owners for example).
Also, in General You May also be able to Offer a Specific Type of Healthcare Reimbursement Plan (HRP) Called a Section 105 Medical Reimbursement Plan
For those who don’t have to comply with the employer mandate and still want to offer reimbursement for non-group coverage. Zanebenefits has suggests something Section 105 Health Reimbursement Plan (HRP). This may be a good choice, but you’ll want to get further guidance before you go this direction under the new law.
According to Zanebenefits
- An HRP does not break the DOL rules and incur the excise tax like an HRA does.
- An HRP is not considered health insurance, the employer simply reimburses the employee for health related expenses up to a set amount each month.
- A HRP does not impose a plan-wide maximum annual benefit and does not allow annual roll-over like an HRA. Although there is a “use-it-or-lose-it” rule.
- There is no limit to the amount of money an employer can contribute to an employee’s HRP. There is also no minimum contribution amount.
It’s important to understand that there has been a lot of confusion around the different types of section 105 plans and their compliance with the new PPACA rules. A correctly structured section 105 reimbursement plan can meet the guidelines laid out by the DOL and IRS, while an incorrectly structured plan could result in the excise tax. If you have less than 50 FTE and want to look into this option, you will want to seek professional advice, familiarize yourself with 26 U.S. Code § 4980D – Failure to meet certain group health plan requirements, and should read this page before making a choice.
The Fee For Reimbursing Individual Non-Group Coverage
Health care arrangement’s (HRAs) set up under a section 105 reimbursement plan can’t reimburse health insurance premiums for private plans purchased by the employee. Employers who reimburse employees for individual non-group health plans face a $100 a day or $36,500 per year, per employee excise tax Details on the rule and the fine can be found here 26 U.S. Code § 4980D – Failure to meet certain group health plan requirements.
Small businesses still have to comply with this rule, but are exempt from the tax. This implies that you can’t reimburse individual coverage and have it count as “offering coverage” not that compensation provided to an employee can’t be used for health costs. So a FSA is OK, an HRA paired with individual coverage will net a large business the excise fee.
If you feel you want to explore the reasoning behind the excise tax and what the rule means see our page on the Fee For Reimbursing Employees for Individual Health Plans.
As Long As You Offer Group Coverage Employer Healthcare Arrangements Have Great Tax Benefits
We suggest taking advantage of all of your options in regards to offering health benefits. So brush up on the rules, and then start looking at how you and your employer can benefit from tax advantages the right way. You used to be able to reimburse individual coverage before the ACA, you can’t do that and have it count as offering coverage anymore. The new rule will be enforced starting July 1st, 2015.
The Facts on Health Reimbursement Programs Under the ACA
Health reimbursement programs are smart. There are tax benefits for both the employer and the employee, but under the ACA there are some very strict and sometimes confusing rules guiding what cuts it and what doesn’t. We try to break everything down on the page, but when making a decision (especially as a large employer) we urge you to double check the guidelines below for yourself.
- Department of Labor Technical Release No. 2013-03 provides final rules for Employer Healthcare Arrangements under the ACA.
- The IRS issued this clarification on HealthCare Arrangements and potential fees.
- On Jan. 24, 2013, DOL and HHS issued FAQs that address the application of the Affordable Care Act to HRAs.
- On Nov. 6, 2014, DOL issued additional FAQs that address the application of the Affordable Care Act to HRAs and other payment arrangements. This includes direction on pairing HealthCare Arrangements with individual subsidized plans.
On February 18, 2015, the Internal Revenue Service issued Notice 2015-17 which provides excise tax transition relief for certain employers maintaining employer payment plans. The 2015 Notice also provides additional guidance on the one-employee health plan exception from the market reform provisions of the Affordable Care Act Medicare premium reimbursement arrangements, TRICARE-related health reimbursement arrangements, and increases in employee compensation to assist with individual insurance policy premiums.
The gist of the notice says that employers who were offering reimbursement for individual plans don’t have to file for exemptions on IRS form 8928 for violations prior to June 30, 2015.
For guidance on IRS Notice 2015-17 click here.
To review IRS Notice 2015 – 17 in its entirety click here.
Get a different perspective on the 2015-17 update here.
Section 105 Health Reimbursement Plans (HRP) Clarification
According to the Department of Labor (DOL) health care arrangement’s (HRAs) set up under a section 105 reimbursement plan can’t reimburse health insurance premiums for private plans purchased by the employee. Employers still need to offer a group plan. Penalties are steep for large employers, but the penalty is waived for smaller employers. (see Q3 DOL.Gov).
Despite the rules, others like zanebenefits.com suggests ways in which small employers can still offer section 105 reimbursement plan that is formally set up and administered. They have a lot of great advice on their site and we suggest using them as a resource for further clarification. Just keep in mind that there is a $36,500 per year, per employee fee for large businesses who don’t comply with the guidelines (although exemptions can be applied for on IRS form 8928 and no exemptions are needed for before June 30, 2015).
Our takeaway: Err on the side of caution and consider offering a group health plan rather reimbursing an individual plan. For those where a section 105 alternative seems like the right move, make sure to get assistance.
ACA Rules for Employer HealthCare Arrangements
There are a few important things to know about employer healthcare arrangements summed up in this IRS document but found in detail in IRS Notice 2013-54. However, it is perhaps most clearly stated in 4980D of the Internal Revenue Code.
- HRA’s and Employer Payment Plans considered group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing.
- They can be integrated with an other plan offered by the employer to satisfy market reforms, but not with individual plans.
- An employer, who would otherwise be eligible to provide health insurance under the Affordable Care Act, cannot avoid offering coverage by using a Healthcare arrangement. So for instance, an employer can’t say, “we aren’t going to offer coverage, but go buy an individual policy and we will reimburse you for it”. All funds or payment methods associated with HRA’s and Employer Payment plans count as “reimbursement”.
- If an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.
- This tax does not apply to small group plans (those with 50 or less full-time equivalents who don’t have to comply with the employer mandate).
- No matter what size of the firm, employees can’t have access to a group health plan and get subsidies on the Marketplace (having access to employer coverage makes one ineligible for subsidies).
- Employers who may owe the tax due to be confused in anyway may face a limited tax or no tax.
Defining Employer HealthCare Arrangements
Health Reimbursement Arrangements (HRAs): An HRA is an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses. Considered group health plans. They Cover premium costs and out-of-pocket costs.
Employer Payment Plans: Employer pays employee directly or insurer to cover premiums (not out-of-pocket costs). Are considered group health plans.
FSAs: An employer sponsored medical savings account for employees with tax benefits. Not group health plans. Only cover out-of-pocket costs.
Large Employers Versus Small Employers
The right Employer HealthCare Arrangement choice for an employer will likely be based on size and employee income. NOTE: We are reviewing the information on this page. It seems some insurers are suggesting employers can contribute to subsidized individual plans. While it the Department of Labor says that employers can’t actually do this. We are going to suggest you go with the Department of Labor. Read Q3 on this document.
- Small employers can offer an HRA or employer payment plan (which counts as them offering coverage for tax reasons).
- Larger employers who are required to insure employees can run into trouble as they “must provide minimum essential coverage or pay a fee“. Employer payment plans count as group health plans, but if an employee gets Marketplace subsidies the employer will owe a fee. Larger employers should offer a healthcare arrangement alongside a group health plan.
- Only employees with household incomes below 400% of the Federal Poverty Line can use Marketplace subsidies. Employers only owe the fee if an employee uses Marketplace subsidies.
- It is better to not offer coverage to employees than to offer an healthcare arrangement in place of coverage (given the large fine for not complying with the rules mentioned above).
- Very small businesses who qualify for the full tax credit may find that they get more value taking advantage of the SHOP tax credit for employers.
ObamaCare and Health Reimbursement Arrangements
A Health Reimbursement Arrangement is an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses incurred by the employee, or their spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period.
- With the HRA, employees receive a set monthly allowance to spend on their choice of qualified health insurance and/or other medical expenses.
- Unlike an FSA below, an HRA allows employees to spend money on premiums and care.
- This reimbursement is excludable from the employee’s income. Amounts that remain at the end of the year generally can be used to reimburse expenses incurred in later years.
- HRA’s are considered to be group health plans, but have special rules for how they count as coverage. Generally they need to be paired with another group policy to satisfy ACA requirements.
ObamaCare and Employer Payment Plans
An employer can choose to use an employer payment plan to pay employee health insurance premiums on the private market as an alternative to a group plan. Payment plans typically focus on premiums, but can be paired with an FSA to lower out-of-pocket costs.
- If an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income
- This allows small employers to contribute to employee premiums while still allowing employees to use Marketplace subsidies.
- Employer payment plans are not minimum essential coverage on their own and don’t satisfy Market reforms on their own. They are however, considered group health plans.
- They do not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.
- Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met.
ObamaCare and Health Flexible Spending Arrangements (Health FSAs)
A Flexible Spending Account, or FSA, is an employee medical savings account. Employers can contribute to the FSA up to the annual limit. Employees can use the FSA for non-health-premium medical care expenses incurred by the employee, or the employee’s spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27.
- A FSA is essentially like an HRA, except an FSA isn’t used for premiums and can be offered along-side a qualifying health plan.
- FSAs provide tax benefits to both employees and employers.
- While employees electing coverage under a health FSA typically also elect to enter into a salary reduction agreement, employers may provide additional health FSA benefits in excess of the salary reduction amount.