Small Business Health Care Relief Act to Remedy Unintended ACA Consequences
the past few months, lawmakers have continued to press for the Small
Business Health Care Relief Act (HR 5447) to move forward. The
bipartisan initiative is meant to help restore the traditional use of
Health Reimbursement Arrangements (HRAs) by small business employers to
help defray the costs of health insurance premium costs and healthcare
expenses without the threat of penalty.
June 15, 2016, the House Ways and Means Committee held a markup of the
bill, which passed by voice vote. The bill heads to the House floor,
where it is expected to face little opposition in passage. If the bill
is not implemented by July 1, 2016, small business employers will face
penalties for the use of HRAs. This Practitioners’ Corner takes a closer
look at the legislation that is meant to remedy unintended consequences
of the IRS interpretation of the Patient Protection and Affordable Care
Act (PPACA or ACA).
the ACA, signed into law on March 23, 2010, group health plans and
insurance standards were introduced as what have been commonly referred
to as market reforms. Most reforms had a deadline for implementation of
January 1, 2014, barring transition relief or any after-enacted
legislation to the contrary. Failure to comply with the market reform
requirements outlined in the ACA would result in heavy penalties, often
accruing by the day, and capping out at maximum amounts.
that much of the ACA had mandates that created requirements for
businesses with more than 50 employees, small business employers were
under the impression that the ACA would have very little impact on their
operations regarding how they chose to assist employees with their
healthcare related costs. However, because of the way the IRS and
Treasury Department chose to interpret one particular aspect of the ACA —
choosing to define Health Reimbursement Arrangements as group health
plans — small business employers found themselves subjected to excise
Group health plans
group health plan is defined as an employee welfare benefit plan that
is either established or maintained by an employer or by an employee
organization, such as a union, or both, that provides medical care for
participants or their dependents either directly or through insurance,
reimbursement, or otherwise. Examples of group health plans include
group health insurance plans, self-insured health plans and self-insured
medical reimbursement plans.
Health Reimbursement Arrangements
Health Reimbursement Arrangement (HRA), also known as health
reimbursement account, is an employer-funded health benefit plan that is
set up to reimburse employees for qualified medical expenses. The funds
that make up an HRA are set aside by employers. The HRA operates
similarly to an insurance plan in the way it reimburses covered
individuals for the cost incurred of medical services.
contributions to employees are done on a pre-tax basis. As such, the
funds are not included in an employee’s gross income and thus escape
taxation. In addition, employees do not claim an income tax deduction
for any medical expenses that are reimbursed in accordance with an HRA.
business employers traditionally use HRAs, as they offer an affordable
way to provide financial assistance to employees to help offset the
costs of health insurance premiums and other qualified medical expenses.
the ACA, group health plans are required to comply with market reforms.
Market reforms include a prohibition against lifetime and annual limits
on essential health benefits. In addition, plans are required to
provide coverage for preventive healthcare services without imposition
of any cost-sharing requirement attached. Other market reforms include a
prohibition against waiting periods of greater than 90 days before an
eligible individual is allowed to participate in a plan and an extension
of dependent coverage to children under the age of 26.
Notice 2013-54: On
September 13, 2013, the IRS issued Notice 2013-54, which directly
affected an employer’s use of stand-alone contribution medical
reimbursement plans, such as HRAs. The Notice served to clarify the
types of plans to which ACA market reforms applied. One such plan
specifically noted in the guidance was pre-tax reimbursement accounts
such as HRAs.
2013-54 described HRAs as "employer payment plans," and were considered
to be group health plans subject to the ACA’s market reforms
requirement. Specifically, the IRS wanted employers to ensure that the
plans did not have annual limits for essential health benefits and that
they provided for preventive care without cost-sharing. The Notice
disallowed the integration of such arrangements with individual market
policies to satisfy the market reforms.
2013-54 outlined that since HRAs are group health plans that are
subject to market reforms, small business employers who make use of HRAs
must ensure compliance with the market reforms or face steep fines for
making such reimbursements to employees. According to Code Sec. 4980D,
fines reach $100 per employee covered by the HRA per day. This excise
tax amounts to $36,500 per year per employee. The penalty is capped at
$500,000 per year.
Reaction from small business community
light of Notice 2013-54, many individuals within the small business and
self-employed communities have expressed frustration with the way the
IRS has decided to handle the use of HRAs, and the imposition of
penalties. Although transition relief had been afforded, and no
penalties have been self-assessed as of yet, as small business owners
and self-employed individuals have prepared for the transition away from
HRAs, they have had to contend with difficulties in employee retention
and hiring. Without an offer of health insurance, or the possibility of
reimbursement for medical expenses, many employees and potential
employees turn elsewhere for employment.
such as the National Federation of Independent Business (NFIB) and the
National Association for the Self-Employed (NASE) urged small businesses
and their employees to write to Congress regarding how Notice 2013-54
and the handling of HRAs would negatively impact their businesses and
livelihood. In addition, these organization, and several others, worked
with key members of the legislature to find some compromise.
Small Business Health Care Relief Act
Representatives Charles Boustany, R-La., and Mike Thompson, D-Calif.,
reintroduced an updated version of bipartisan legislation known as HR
5447, the Small Business Health Care Relief Act. Senators Charles
Grassley, R-Iowa and Heidi Heitkamp, D-N.D., introduced the analogous
bill, S. 3060, in the Senate. The bill is "to provide an exception from
certain group health plan requirements for qualified small employer
health reimbursement arrangements (QSEHRA)."
If passed, HR 5447 would allow small business employers to continue
using HRAs to assist employees with their out-of-pocket healthcare
expenses without being subjected to the penalties associated with ACA
compliance deficiencies. Specifically, the proposed legislation:
Ensures that small businesses with fewer
than 50 employees can continue to use pre-tax dollars to reimburse
employees for qualified healthcare expenses
Outlines that small employer health
reimbursement arrangements are exempt from ACA requirements and the
accompanying financial penalties for failing to comply with those
Mandates that an employee must have a
qualified healthcare plan through either the individual marketplace or a
spouse to utilize an HRA
proposal provides that a QSEHRA is generally not a group health plan
under applicable provisions. It is defined as an arrangement that: 1. is
provided on the same terms to all eligible employees of an eligible
employer; 2. is funded solely by the eligible employer and no salary
reduction contributions may be made under the arrangement; 3. provides
for the payment or reimbursement of medical expenses of the employee and
family members; 4. has payments and reimbursements under the
arrangement for a year that cannot exceed specified dollar amounts.
Eligible employee and employer: The
proposal states that an "eligible employee" is any employee of an
eligible employer, and provides that the terms of the QSEHRA may exclude
certain types of employees outlined in the proposal. An "eligible
employer" is an employer that: 1. is generally an employer with fewer
than 50 full-time employees during the preceding year; 2. does not offer
a group health plan to any of its employees.