Wednesday, July 20, 2016

Small Business Health Care Relief Act to Remedy Unintended ACA Consequences

Over 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.
On 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).
Background
Under 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.
Given 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 tax liability.
Group health plans
A 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
A 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.
HRA 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.
Small 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.
Market reforms
Under 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.
Notice 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.
Notice 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
In 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.
Organizations 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
House 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)."
Legislation: 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 requirements
  • Mandates that an employee must have a qualified healthcare plan through either the individual marketplace or a spouse to utilize an HRA
QSEHRA: The 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.

No comments: