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21st Century Cures Act: Small Employer HRAs Not Subject to Penalties

Posted 12:00 PM by

On Dec. 13, 2016, President Obama signed the 21st Century Cures Act, which exempts small employer health reimbursement arrangements (HRAs) from the group health plan requirements. Prior to the 21st Century Cures Act, an HRA not integrated with another employer group plan was subject to a penalty of $100 per day, per employee.

Under the new law, small employers – those with fewer than 50 full-time-equivalent employees (FTEs) – can offer a “qualified small employer HRA” to its employees. In order to be a qualified small employer HRA, the following requirements must be satisfied:

  1. Employer must not be an applicable large employer (i.e., employ fewer than 50 FTEs).
  2. Employer must not offer a group health plan to any of its employees.
  3. The HRA is provided on the same terms to all eligible employees.
  4. The HRA must be funded solely by the employer, and no salary reduction contributions may be made.
  5. The HRA provides, after the employee provides proof of coverage – for the payment, or reimbursement – of an eligible employee for expenses for medical care incurred by the eligible employee or the eligible employee's family members.
  6. The amount of payments and reimbursements for any year must not exceed $4,950 for an employee ($10,000 if the HRA provides for payments for family members of the employee). These amounts will be adjusted annually for inflation.

The HRA must be offered to all eligible employees. This includes all employees except those employees that:

  • Have not completed 90 days of service.
  • Have not attained age 25.
  • Are part-time or seasonal employees.
  • Are covered by a collective bargaining agreement.
  • Are certain nonresident aliens.

The new law is effective for tax years beginning after Dec. 31, 2016.

Reporting Requirements for Qualified Small Employer HRAs

If an employer participates in a qualified small employer HRA, then the employer must provide written notice to each eligible employee no later than 90 days before the beginning of the plan year. The notice must include:

  • The employee’s reimbursement amount for the year.
  • A statement that the eligible employee should provide the information regarding the amount of permitted benefit to any health insurance exchange to which the employee applies for an advance payment of the premium assistance credit.
  • A statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax under section 5000A for such month and reimbursements under HRA may be includable in gross income.

The penalty for failing to provide the proper written notice is $50 per employee, per incident, with a maximum penalty of $2,500 per calendar year. Transitional relief is available if notice is provided within 90 days after the date of this law’s enactment.

About the Author

Stephen Schnelker is a manager in Katz, Sapper & Miller's Tax Services Group. Stephen's primary responsibilities include analytical research, compliance, and providing planning services to clients in the areas of individual and business taxation. 

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Comments (1)
Mark wrote
Thank you for the timely update on this issue. In many cases, if an employee of a small business is purchasing health insurance on the exchange, that employee may qualify for a subsidy, dependent on income, family size and other variables. My understanding is that, if such an employee received assistance from his/her employee via and HRA, as now permitted by the 21st Century Cure Act, that employee's subsidy would then be reduced. Can you confirm whether this is the case?Thank you
Posted Dec 16 2016 9:27 PM
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