On June 13, 2019, the IRS, Department of Labor and Department of Health and Human Services issued final regulations which will expand the use of Health Reimbursement Accounts (HRAs) to allow smaller employers to use pretax dollars to subsidize employee health insurance premiums in the individual health insurance market.
As background, an HRA (not to be confused with a Health Savings Account, or HSA) is an account funded solely by employer contributions to be used by the employee exclusively for medical care expenses incurred by the employee, his/her spouse, dependents and children under the age of 27. Amounts which are used to reimburse the employee are not subject to federal income and employment taxes.
The final regulations provide some notable features that expand the use of HRAs:
- An employer does not have to offer health insurance to offer an HRA, and the HRA can be used to pay insurance premiums for insurance that the employee obtains. In other words, an employee could acquire his/her own health coverage through the federal insurance exchange, private insurance or Medicare.
- Acceptable individual health coverage would not need to meet all of the requirements of the Affordable Care Act (ACA).
- An “excepted benefit HRA” is available which permits employers offering traditional health plans to provide an HRA of up to $1,800 per year, even if the employee does not enroll in the employer’s traditional group health plan.
Smaller Employers and Their Employees Stand to Benefit
Smaller employers (i.e., those who are not subject to the ACA) may find that the final regulations offer an alternative method of providing health coverage to their employees. Many smaller employers have offered no coverage to their employees (due to cost or availability), and employees have had to obtain coverage on their own. Under the final regulations, the employer could offer an HRA with a fixed dollar amount of contribution, and the employees could use this to pay their premiums or expenses; in this way, the employer can limit its expenditure, and the employees can pay a part of their insurance premiums with tax-free dollars.
Additionally, if non-ACA compliant health insurance programs are offered in the marketplace, employees of these small employers could elect coverage under these programs. This may prove to be less expensive coverage as fewer benefits are provided under this type of policy.
The regulations are effective for years beginning on or after Jan. 1, 2020. Small employers should consider setting up an HRA for their employees and determining the amount of the annual contribution to the program prior to the beginning of 2020. The entire text of the final regulations (457 pages) can be found here.
This post presents a brief overview of the final regulations. It is obvious that the final regulations provide an alternative for a small employer who is either offering no coverage to employees or providing a program that is expensive to both the employer and the employees. Our professionals would be pleased to discuss the impact of these final regulations on your company. For more information, call Ted Ginsburg, CPA, JD, at 440-449-5800 or email Ted.