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Jack Owen’s Tax Exempt Alert–December 2016

Jack Owen’s Tax-Exempt Alert


By James Conley, Esq.

Congress recently passed and President Obama signed a new law that will allow some small employers, including nonprofit organizations, to use Health Reimbursement Arrangements (HRAs) again.  The 21st Century Cures Act, which takes effect January 1, 2017, exempts qualified small employer health reimbursement arrangements (QSEHRAs) from the Affordable Care Act (ACA) provisions that prevented many employers from using HRAs.

The Internal Revenue Service took the position in IRS Notice 2013-54 that in many circumstances HRAs reimbursing employees for health insurance premiums violated the ACA’s prohibition on annual benefit limits.  The 21st Century Cures Act restores the ability of some small employers to use HRA’s to reimburse employees for health insurance premiums, although there are limits on the use of QSEHRAs.

The new law places the following limits on QSEHRAs:

  • Only small employers that are not considered large employers under the ACA may offer a QSEHRA.
  • The annual reimbursement level is limited to $4,950 for individuals and $10,000 for family coverage.
  • Only small employers that do not offer group health plan coverage to any employees are eligible to use a QSEHRA.
  • Reimbursements are excluded from an employee’s taxable income only if the employee has minimal essential coverage (as defined by the ACA) and furnishes proof to the employer.
  • The QSEHRA must be offered on the same terms to all eligible employees.  Eligible employees are all employees except employees who have been employed for less than 90 days, employees under age 25, part-time or seasonal employees and collectively bargained employees, unless the collective bargaining agreement provides for eligibility.

Although President-elect Trump and the Republican party, which controls both houses of Congress, have indicated an intent to repeal the ACA, the repeal may not take effect for some time so the 21st Century Cures Act is welcome news for small employers.