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Hidden Traps for Small Employer HRA in 2014

Like many small employers with under 50 full-time equivalent employees, most small employers thought they would be relatively unaffected by the Affordable Care Act. Upon review of the law, it is discovered that Healthcare Reimbursement Arrangement are legal, but are now completely unworkable.

Employers have offered for several years to full-time employees a standalone HRA for which they get pre-tax reimbursements for out-of-pocket medical expenses and health insurance premiums, up to the annual predetermined dollar limit. HRAs generally fall under Code Section 105(b) and are considered employer self-insured accident or health plans. By design, HRA plans have dollar limits on annual and lifetime benefits provided to participants. However, to be a qualified group health plan in 2014, the plan must provide minimum essential health benefits without annual or lifetime dollar limits. These employer HRA plans or offerings fail to meet this basic requirement.

Group health plans that do not comply with annual or lifetime limit rules are potentially subject to a severe penalty under Section 4980D. The penalty is $100 per day per participant, but limited to a maximum of 10% of the amount paid by the plan during the year where the failure is due to reasonable cause and not willful neglect.

Some small employers qualify for exceptions to the penalty. A small employer is one that employed an average of at least two but not more than 50 employees on business days in the preceding calendar year. However, the exception only applies if the health coverage is solely provided by an insurer and the failure is due to reliance on an insurer. If the company provides a reimbursement for insurance and not an insurance policy the plan is uninsured and does not qualify for this exception.

The penalty can also be avoided if the employer can show that they did not know that the violation existed (after exercising due diligence) and it was corrected within 30 days of discovery of the failure. The IRS could waive all or part of the penalty if the failure is due to reasonable cause and not willful neglect to the extent that the payment of the tax is excessive relative to the failure involved.

The ACA require employers to terminate standalone HRA or add qualifying group health insurance to the plan effective Jan. 1, 2014 to comply with ACA. Employees are the losers in this situation, as they will be required to be taxed on the fixed dollar benefit as wages that were previously received tax-free through the HRA reimbursement plan provided for their health care costs.