ACA Alert: Health Reimbursement Arrangements Affected by ACA

affOVERVIEW:

Regulations established by the Patient Protection & Affordable Care Act (ACA) create extensive penalties for some Health Reimbursement Arrangements (HRAs) which for decades have been a popular vehicle for small employers to subsidize employee health insurance coverage.

DETAILS:

Since the 1960’s, HRAs have been used by some small employers who did not offer group health plans as a vehicle to reimburse employees for non-group individual or family coverage. Other employers established Employer Payment Plans (EPPs) – a sub-category of HRA – through which the employers paid premiums for employees’ non-group individual or family coverage directly to insurance carriers.

In recent Notices (IRS Notice 2013-54 and 2015-17), the IRS has taken the position that HRAs established independent of comprehensive group health plans do not conform the ACA and, therefore, represent non-compliant group health plans. Such non-compliant group health plans are subject to a penalty of $100 per day per employee (i.e. $36,500 per year per employee). The September issue of the American Institute of Certified Public Accountants (AICPA)’s Journal of Accountancy includes an article which goes into significant detail with respect to these changes.

Katzabosch works with clients and their benefits consultants to identify structures which allow employers to establish robust, yet cost effective, benefits packages for their employees. Often, small employers and start-ups do not wish to sponsor group health coverage for only a small number of employees. Until recently, establishing stand-alone HRAs was a common strategy to achieve this goal, but the ACA has made stand-alone HRA’s much less appealing because they are likely to be treated as non-compliant group health plans subject to the penalties discussed above.

In order to avoid some of the pitfalls of HRAs, some small employers have opted to sponsor small-business health plans available via the state sponsored SHOP marketplaces (see our previous blog post for further insight). However, a popular alternative seems to be for employers to choose not to offer health insurance at all. Some employers will offer a more robust salary to attract talent, but it is important that employers not establish a “quid-pro-quo” trade-off between an increase in wages and the lack/removal of health insurance coverage; otherwise the IRS could take the position that a de-facto reimbursement plan has been established and the $100 per day per employee penalty could be levied.

KatzAbosch encourages employers to thoroughly discuss prospective changes to their benefits offerings with their CPA and/or benefits consultants before making final decisions.

Eaton_2013For more information or specific questions, please contact a KatzAbosch tax advisor at 410-828-CPAS (2727) or email jeaton@katzabosch.com.

Submitted by James Eaton, III, CPA, PFS, MBA, Manager at KatzAbosch.

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