Health Reimbursement Arrangements (HRA)

As a business owner, you may have heard about or even implemented a Health Reimbursement Arrangement (HRA). These arrangements allow employers to assist employees with paying health insurance premiums and other qualified medical expenses. 

The Affordable Care Act (better known as the “Obamacare” legislation) included a provision that imposed a $100 per day per employee “excise tax” on employer health plans which are not part of a qualified group health plan. Therefore, many standalone HRAs were subject to the excise tax (some section 105 HRAs were exempt from the excise tax if structured correctly). 

The 21st Century Cures Act, passed and signed in December 2016, created a new “small employer HRA category” effective January 1, 2017 which is not subject to the excise tax. 

An employer is eligible if they are a “small employer” (less than 50 full time equivalent employees) who do not offer health insurance to their employees and who meet the criteria detailed below. 

Employers may pay for, or reimburse, medical insurance premiums for employees and dependents, up to $4,950 per year for individuals ($10,000 per year for families).  

The qualifications to be considered a tax-free fringe benefit are:

  • The HRA must be funded 100% by the employer.
  • It must be offered to all eligible employees (offerings are not required to those who are part-time, seasonal, under the age of 25, within the first 90 days of service as an employee, or part who are part of a collective bargaining agreement).
  • Participating employees must have qualified minimum essential insurance.
  • Employee must submit documentation/receipts for reimbursement
  • Employers must notify employees at least 90 days in advance of starting an HRA.
  • The annual benefit is reported on the W-2 (box 12 or 14).  

Participating employees do not pay tax on the reimbursements, and employers are not required to withhold payroll taxes on the annual HRA benefit. The arrangement can provide different reimbursement amounts based on the employees’ age and family size. Any unused portion of the maximum dollar amount may be carried forward to subsequent years. 

Maximum contribution amounts are prorated for part-year employees, and will be adjusted for inflation annually. Employees may be excluded as ineligible if they are under age 25, employed for less than 90 days, part-time, or seasonal. 

If employees have purchased insurance through the health care exchange and are receiving premium tax credits, the amount of credit they are eligible for may be reduced by the HRA. Employees should immediately notify the exchange of any HRAs. 

If you are interested in implementing or knowing more about small employer HRAs, contact a CPA to help you determine if it is a fit, and a solid plan for implementation. 

 

BGBC Partners, LLP is a full service certified public accounting and business consulting practice.