21st Century Cures Act Allows Stand-Alone Health Reimbursement Arrangements for Small Employers

On December 13, President Obama signed the 21st Century Cures Act which, among other things, allows certain small businesses with no group health plan to reimburse employees for medical expenses, including health insurance premiums, without incurring penalties under the Affordable Care Act (ACA).  The legislation also covers a broad range of other health-related topics, including medical research, drug development, mental health care, and Medicare.  Previously, the IRS had concluded that Employer Payment Plans and stand-alone Health Reimbursement Arrangements (“HRAs”) are group health plans that fail to comply with the ACA market reforms, and are therefore subject to fines up to $100 per day per employee, or up to $36,500 per year.

The new legislation overrules the IRS position by defining “group health plan” as not including “any qualified small employer health reimbursement arrangement.”  Therefore, employers that are not “applicable large employers” and do not offer a group health plan to any of their employees may now reimburse employees for the costs of health insurance premiums and/or other medical costs such as deductibles and copays without facing penalties.  In order to be a qualified HRA under the new rules, the HRA must meet all of the following requirements:

  • It is provided on the same terms to all eligible employees. An eligible employee is any employee of the employer, except that the HRA may exclude from consideration employees who haven’t completed 90 days of service, employees who haven’t attained age 25, part-time or seasonal workers, employees covered in a collective bargaining unit, and certain nonresident aliens. Also, the law allows for an employee’s benefit under the arrangement to vary in accordance with the variation in the price of an insurance policy in the relevant individual health insurance market based on the employee’s age and the number of family members covered under the arrangement.
  • It is funded solely by the employer, and no salary reduction contributions may be made under the HRA.
  • It provides, after the employee provides proof of coverage, for the payment of, or reimbursement of, an eligible employee for expenses for medical care incurred by the eligible employee or the employee’s family members (as determined under the HRA’s terms).
  • Annual benefits under the HRA cannot exceed $4,950 per year ($10,000 if family members are covered). For years after 2016, these amounts are subject to cost of living increases. For employees who are covered by a qualifying HRA for less than a year, the above dollar limits are prorated.

The new rules apply to years beginning after December 31, 2016.  Also, the law provides transition relief from the ACA penalties for years beginning before December 31, 2016, for HRAs offered by employers that are not applicable large employers.

Please contact me or your HBK representative with any questions.

About the Author(s)

Mike Walston is a Principal in HBK's Tax Advisory Group located in the Youngstown office. He has been with HBK since 2013, focusing on tax compliance and consulting for closely held businesses, individuals, trusts and estates. Mike joined the Tax Advisory Group in 2019 and has been leading HBK’s Affordable Care Act niche since 2015.

Mike’s tax experience includes compliance and consultation for both public and private companies, individuals, Trusts, and Estate and Gift tax matters. He has extensive experience working with partnerships and S corporations in a variety of industries. Mike currently spends a significant amount of time researching complicated tax issues, providing compliance reviews for tax returns, and analyzing and planning for the estates of high net worth individuals.

Prior to joining HBK, Mike spent eight years with Deloitte Tax LLP in Cleveland, Ohio. Mike attended Miami University, where he received his Bachelor of Science degree in Accounting.

Mike is currently licensed to practice accounting in both the State of Ohio and the State of Pennsylvania. He is a member of the American Institute of Certified Public Accountants (AICPA).

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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