Congress Passes “Cures Act” Allowing Stand-Alone HRAs for Small Employers
On Dec. 7, 2016, the US Congress passed HR 34, called the “21st Century Cures Act” (Cures Act). The Cures Act legislation will permit small employers (those with fewer than 50 full-time employees during a calendar year who are not subject to the employer mandate) who do not offer a group health plan to provide a qualified small employer health reimbursement arrangement (QSEHRA).
As background, HRAs are generally considered “group health plans” under PPACA’s market reform provisions, the IRC, ERISA and the Public Health Service Act (PHSA) and could not be offered on a stand-alone basis. However, the Cures Act exempts QSEHRAs from the group health plan definition, and thus from PPACA’s market reform provisions (except for the Cadillac tax). Therefore, eligible employees may use these qualified small employer HRAs to purchase coverage through the individual market (including the exchanges) if the following criteria are met:
- Employer is not an applicable large employer subject to the employer mandate;
- The HRA is entirely employer-funded; no employee salary reductions permitted;
- Employer does not currently offer a group health plan to any employees;
- Reimbursements may only be used for IRC Sec. 213(d) qualified medical expenses;
- QSEHRA benefits must be offered on the same terms to all “eligible employees” (some employees can be disregarded);
- QSEHRA benefit may be excluded from the employee’s income only if the recipient has proof of minimum essential coverage (individual coverage on or off the exchange is allowed); and
- Annual QSEHRA benefits may not exceed maximum of $4,950 for an individual, or $10,000 if family members are covered (indexed annually).
In addition, small employers funding a QSEHRA are required to provide an annual notice to all eligible employees. Generally, this notice must include the annual HRA benefit, a statement that the employee should furnish HRA information to the exchange if applying for a premium tax credit, and a statement warning against a tax penalty assessed for failure to carry minimum essential coverage and that HRA reimbursements could be includable in gross income. Failure to provide a notice could result in penalties assessed on the employer, but a grace period is available for employers who provide the notice within 90 days of the law’s enactment.
For any month that an employee is provided a QSEHRA which constitutes affordable coverage, the employee would not be eligible for a premium tax credit on the exchange. Determined by the exchange, the coverage is affordable if the employee’s premium for self-only coverage under the second-lowest cost silver plan minus 1/12th of that employee’s permitted benefit for that month is not more than 1/12th of 9.5 percent of the employee’s household income for the year. Employers need not concern themselves with affordability (since only small employers—not subject to PPACA’s employer mandate—would be eligible to offer QSEHRAs). Otherwise, if the HRA coverage is not considered affordable, the employee’s monthly premium tax credit would generally be reduced by 1/12th of the HRA annual benefit amount.
Assuming the Cures Act is signed by President Obama (most expect he will), the provision is effective Jan. 1, 2017. Thus, small group employers should work with advisors in determining appropriate next steps.