Prior to tax years beginning January 1, 2017, employers who reimbursed employees for the cost of premiums for individual and family health coverage were subject to the Patient Protection and Affordable Care Act (ACA)’s excise tax. This is because the IRS took the position that group health plans that reimbursed or paid employee premiums for individual coverage were subject to an excise tax (up to $100 per affected individual per day) for violating the group plan rules. Under transition relief, small employers were temporarily exempted from excise tax from January 1, 2014, to June 30, 2015.
Under the pre-2017 rules, if an employer desired to help employees pay for health care coverage and avoid the onerous excise tax, those monies had to be paid to the employees and included in their W-2s as compensation. The employees could then use those “reimbursement” monies to pay for health care coverage or for any other purpose.
For tax years beginning after December 31, 2016, qualified employer health reimbursement arrangements (HRAs) are not treated as group health plans for purposes of the group health plan requirements provided by the ACA. Therefore, for plan years starting after 2016, small employers may adopt HRA to reimburse employees for the cost of premiums for individual and family health coverage without being subject to an excise tax for failure to comply with ACA’s market reforms.
To qualify as an HRA, employers should consult with their health care provider and tax professional. These arrangements must provide minimum essential coverage and meet affordability standards and are permitted to be integrated with individual employee coverage including ACA exchange coverage. The arrangement must be provided on the same terms to all eligible employees of the eligible employer. An “eligible employer” is an employer that is not an “applicable large employer” as defined for purposes of the large employer shared responsibility payment provisions of ACA, and one that does not offer a group health plan to any of its employees.
In addition, the arrangement must:
- be funded solely by the eligible employer; no salary reduction contributions under a cafeteria plan are allowed;
- provide for the payment or reimbursement of medical expenses incurred by the eligible employee or employee’s family member; and
- provide that the total payments and reimbursements for any year cannot exceed $4,950 ($10,000 for family coverage). The annual dollar limit is adjusted for inflation for years beginning after 2016 in $50 increments.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, including how to adopt an age-weighted profit-sharing plan, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.