The Affordable Care Act (“ACA”) includes provisions that place restrictions on medical reimbursement plans and Health Reimbursement Arrangements (“HRAs”). These provisions are effective for plan years beginning after 2013. These rules apply to ALL employers, large and small. The following is a discussion of medical reimbursement plans and how the market reform provisions will affect employers offering these plans.
Medical Reimbursement Plan and HRA Basics
By definition, medical reimbursement plans and HRAs are funded entirely but the employer and typically reimburse employees for out-of-pocket medical expenses and individual health insurance premiums. HRAs are a type of medical reimbursement plan with a feature that allows employees to carryover unused funds that were authorized, but not fully used, to the next tax year. Employees are reimbursed tax-free for qualified medical expenses up to a maximum dollar amount for each coverage period. The employer is also allowed to deduct the cost of the plan for tax purposes. The plan defines the types of health care costs for which the employee will receive reimbursement.
New ACA Rules
Effective January 1, 2014 the market reform rules imposed by the ACA, eliminate the ability for some employers to use medical reimbursement plans and/or HRAs. Under these rules, health plans cannot impose annual dollar limits on certain health benefits, and they also must provide preventive health services at no cost to the employee. Unfortunately, most stand-alone medical reimbursement plans and HRAs do not meet these requirements.
In order to meet the market reform provisions of the ACA, the HRA plan must be integrated with primary health insurance coverage offered by an employer. There are rules here as well. In order for the HRA plan to be integrated with primary health insurance coverage, the HRA must only be available to employees who are covered by primary group health coverage that is provided by the employer and that meets the annual dollar limit prohibition.
In addition, employer pretax reimbursement of non-employer sponsored health insurance premiums fails to meet the requirements of the market reform provisions. This also includes employer payment of premiums for non-employer sponsored health insurance directly to the insurance company. These are known as employer payment plans. The reasoning behind employer payment plans failing to meet the market reform provisions is that the ACA disallows a limitation on medical benefits provided under a group health plan, and an employer payment plan limits benefits to the amount of the premium reimbursed or paid. In order to comply with the market reform provisions, the employer may either provide an employer-sponsored qualified plan or replace a premium reimbursement arrangement with a taxable increase in wages that can be used by the employee to pay their own health insurance premiums.
The penalty for noncompliance with the market reform provisions of the ACA is severe. For violating these rules, an employer is subject to a penalty of $100 per day, per employee, or $36,500 per participant per year. It is imperative for employers to carefully consider whether their medical reimbursement plan or HRA violates the market reform provisions, causing the business to be subject to this penalty.
More than 2% S Corporation Shareholder/Employees
It’s important to briefly discuss how these rules will affect a more than 2% shareholder/employee of an S Corporation. The basic rules are still the same from previous years. Employers can still reimburse or pay a more than 2% shareholder’s premiums, include the premium reimbursement in the shareholder’s W-2 (subject to income tax, not FICA), and deduct the additional compensation amount. Additionally, the shareholder can still deduct the premium reimbursement as an above-the-line, “for AGI” deduction even after 2013. Here’s where the market reform provisions of the ACA come into play. If the premiums that the S Corporation is paying or reimbursing are on non-employer sponsored health insurance for more than one S Corporation employee, then the reimbursement arrangement would be considered a group plan subject to the ACA provisions. Therefore, the penalty discussed above could apply, unless the premium reimbursement is included in the W-2 wages and taxable for BOTH income tax and FICA.
Exceptions for Some Plans
There are some limited exceptions under which stand-alone medical reimbursement plans and HRAs may continue without violating the market reform provisions of the ACA.
Ancillary Benefit Plans – Medical reimbursement plans and HRAs are permitted for ancillary benefits. These include vision, dental, long-term care, and disability coverage.
Integrated Plans – Integrated plans are defined as a medical reimbursement plan or HRA that is combined with health insurance coverage, so that the total coverage provides an ACA-approved group health plan.
Consequently, an ACA-approved group health plan (including a group health plan provided by another employer such as a plan maintained by the employer of the employee’s spouse) integrated with an HRA will not violate the market reform provisions.
Retiree Only Medical Reimbursement Plans
As a result of the market reform provisions of the ACA, employers are restricted from subsidizing or reimbursing employees for individual health insurance premiums on a pretax basis. Employers can however, provide a tax-free benefit to employees through an ACA-approved group health plan. They may also treat reimbursement of premiums for individual health insurance as compensation taxable for both income tax and FICA purposes. The penalties for noncompliance are harsh, so it’s important to understand how the ACA provisions will affect the plans that you currently have in place. Please give us a call at (719) 630-1186 if you need some assistance or have questions regarding this very complex topic.