Cures Act brings relief to employers without Group insurance

Small Business HRA provision signed into law

ISSUE

IRS Notice 2013-54 issued in September 2013 limited the ability of small business owners to utilize standalone HRAs. Prior to this guidance, many had used HRAs to reimburse their employees for certain medical expenses using pre-tax dollars. As a result of IRS Notice 2013-54, a company with more than one eligible employee could no longer receive a tax advantage through an HRA unless it sponsored Group insurance – an expense that’s beyond many small companies’ reach – or offered a Limited Purpose HRA. This new legislation overturns a portion of the guidance issued in IRS Notice 2013-54 and once again allows small employers to utilize HRAs as a pre-tax health & welfare benefit.

IMPACT / MOVING FORWARD

Beginning January 1, 2017, qualified businesses can now establish a Small Business HRA (SBHRA) to use tax-advantaged funds to reimburse employees for individual health insurance premiums and family out-of-pocket medical expenses. This change does not affect one-employee, integrated, or Limited Purpose HRA Plans that are already compliant with federal law.

Highlights include:

  • Employers must have fewer than 50 FTEs[i] and cannot offer a group health plan.
  • SBHRAs may reimburse an employee for qualified out-of-pocket medical expenses under §213(d) of the Code and individual health insurance premiums – including for plans purchased on the public ACA Marketplaces.
  • Employer annual contributions will be capped at $4,950 for a single employee and $10,000 for an employee with a family. These numbers will be indexed annually for inflation and are to be prorated for mid-year enrollment.
  • Participation in a SBHRA does not necessarily disqualify participants from receiving Marketplace subsidies (i.e. premium tax credits), but monthly SBHRA reimbursements will be included in income calculations for determining eligibility for any subsidy.
  • Generally, employers must make the same contributions to all eligible employees; however, the benefit may vary based on the cost of health insurance tied to the employee’s age and/or number of family members covered.[ii]
  • Employees must have minimum essential coverage in order to participate; if not, the reimbursement amount will be reflected as part of the employee’s gross income for tax purposes.[iii]
  • SBHRAs are solely funded by an eligible employer; they are employer-sponsored and reimbursed benefits. The employee is not allowed to contribute pre-tax dollars via salary reduction.
  • Unused elected amounts can be carried over to reimburse medical expenses in future years OR can be offered as a use it or lose it feature to limit the employer’s liability to the current Plan Year.
  • Employers must provide notice of the benefit to their employees at least 90 days before the start of each plan year.[iv]
  • The employer is required to report the SBHRA benefit on each employee’s Form W-2[v]
  • Group health premiums (i.e. for coverage offered by a spouse’s employer) cannot be reimbursed.
  • Not considered a group health plan for purposes of COBRA, ERISA, HIPAA, etc.

SBHRAs provide a tremendous opportunity to those small employers who do not, or are no longer able to, offer Group health but want to assist their employees with ever rising healthcare costs. As with any new legislation impacting our business, additional guidance is expected to be issued that may affect the scope of our service offering. Furthermore, any efforts by President-elect Trump and the new GOP Congress to repeal and replace the ACA may very well impact these new rules…stay tuned to TASC’s Capital Connection for more information.

[i] This count is based on the current ACA definition, meaning that the Employer was not considered an “Applicable Large Employer” during the previous year.

[ii] Thus, an employer could provide a greater benefit to an employee who is older or covers multiple family members.

[iii] These payments/reimbursements nevertheless continue to be excluded from wages for employment purposes.

[iv] “Transitional relief” is provided for the first year (2017)…the notice must delivered within 90 days after the date of the enactment of this Act (i.e. on or before March 13, 2017).

[v] Tentatively set to take effect in 2018 (for the 2017 tax year). Currently, this ACA provision only applies to employers with 250+ employees; small employers (i.e. those eligible to offer a SBHRA) are temporarily exempt.

SBHRA language headed to White House as Congress approves Cures Act

Stand-alone” HRAs one step closer to compliance

UPDATE: President Obama is expected to sign the measure into law soon after it reaches his desk, meaning a solution for beleaguered small businesses is on the way. Once enacted, a Small Business HRA will allow qualified entities to use tax-advantaged funds to reimburse employees for individual health insurance premiums and other out-of-pocket medical expenses. (Note: This change does not affect integrated or one-employee HRA plans that are already compliant with federal law.)

This legislation provides a tremendous opportunity for those small employers who do not offer group health but want to assist their employees with ever rising health care costs. Be on the look-out for additional communications from TASC (including here at Capital Connection) in the coming weeks to ensure peace of mind for our Providers, Clients and Participants. We’ve got you covered!

For additional details on this topic, please see our previous posts:

Lawmakers reach tentative deal to expand small biz health options (Nov. 28, 2016) https://tasccapitalconnection.com/2016/11/28/lawmakers-reach-tentative-deal-to-expand-small-biz-health-options/

Stand-alone HRAs making a comeback? (June 30, 2016) https://tasccapitalconnection.com/2016/06/30/stand-alone-hras-making-a-comeback/

Lawmakers reach tentative deal to expand small biz health options

Over the weekend, Congress introduced an end of the year health package containing mental health initiatives, Medicare provisions, medical research funding…AND one of TASC’s top priorities – the Small Business Healthcare Relief Act (SBHRA). If enacted, the SBHRA would allow small businesses to once again use an HRA to assist employees with health insurance premiums and out-of-pocket medical expenses.

Brief summary:

  • Has an effective date of January 1, 2017.
  • Available to small employers (with fewer than 50 full-time employees) who do not offer a group health plan.
  • Participants must have minimum essential coverage in order to receive the benefit.
  • Employer annual contributions would be capped at $4,950 (employee) / $10,000 (family).
  • Generally, employers must make the same contributions to all eligible employees; amounts may vary based on family status (i.e. single vs family).
  • Would not disqualify participants from premium tax credits (i.e. marketplace subsidies); however, monthly HRA reimbursements will be included in income calculations for determining eligibility.

This 900 page, $6.3 billion negotiated deal is expected to be voted on by the House as early as Wednesday. The Senate is then expected to follow suit, taking up the measure sometime before final adjournment in December.

 

ALERT: IRS delays some ACA reporting

Following consultation with stakeholders, the agency has determined that a substantial number of employers, insurers, and other coverage providers may need additional time to prepare 2016 Forms 1095-B and 1095-C. As a result, the deadline for furnishing this information (to individuals) has been extended from January 31, 2017, to March 2, 2017.

Because some individuals may not receive a Form 1095-B or Form 1095-C by the time they are ready to file their 2016 tax return, taxpayers may rely on other information received from their employer or coverage provider for the purposes of determining eligibility for premium tax credits and confirming that they had minimum essential coverage. Taxpayers do not need to wait to receive Forms 1095-B and 1095-C before filing their returns.

Note: This guidance does not extend the timeframe for submitting 2016 Forms 1094-B, 1095-B, 1094-C, or 1095-C to the IRS…those dates remain the same (February 28, 2017 or March 31, 2017, if filing electronically.)

Notice 2016-70: https://www.irs.gov/pub/irs-drop/n-16-70.pdf

Form 5500 Regs. released

Agency also publishes changes to annual reporting under ERISA

Last week, the Department of Labor (DOL) issued a proposal to modernize and improve the Form 5500 Annual Return / Report filed by private-sector employee benefit plans in order to keep pace with market developments and changes to the legal requirements governing employee benefit plans.

Under Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, pension and other employee benefit plans are generally required to file annual documentation concerning, among other things, the financial condition and operations of the plan…and the 5500 is the primary source of that information. In addition to serving as an essential compliance and research tool for federal agencies, Congress and the private sector also rely on the 5500 as an important source of information for assessing employee benefits, taxes, economic trends and policies.

Most notably, the revisions appear to require reporting by ALL group health plans covered by Title I of ERISA. This includes eliminating the current exemption from Form 5500 reporting for small insured and self-insured welfare benefit plans.

Implementation of the new forms could begin as early as the 2019 Plan Year.

The Governmental Affairs team continues to review the language of this latest guidance in order to determine if any additional changes have been made, and whether or not TASC will submit public comments by the Oct. 4 deadline. We will communicate further on this topic in the future.

Doctor’s note

Pending legislation would do away with “Letter of Medical Necessity” requirement

This week, the House of Representatives passed the Restoring Access to Medication Act (H.R. 1270), which would overturn a provision* of the ACA and restore the ability of plan participants to use FSAs, HRAs and HSAs funds to purchase over-the-counter drugs and medicines. The bill will now head to the Senate for further consideration.

The Administration says it strongly opposes the repeal effort because it “would create new and unnecessary tax breaks that disproportionately benefit high-income people, increase taxes for low and middle income people, and do nothing to improve the quality of or address the underlying cost of health care.” Thus signaling that if the President were presented with H.R. 1270, he would veto the measure.

TASC believes the idea is based on common sense principles and puts healthcare cost management back where it belongs – in the hands of the people. The Governmental Affairs team will continue to follow this topic and provide our Clients/Providers with status updates throughout the year.

*Section 9003

Stand-alone HRAs making a comeback?

Pending bill responds to agency action

Since its introduction, TASC has been actively monitoring a piece of legislation known as the Small Business Healthcare Relief Act with great interest. Last week the House of Representatives passed H.R. 5447 on a voice vote.

Sponsored by Rep. Boustany (R-LA) and Rep. Thompson (D-CA), this measure would greatly improve small business access to competitive health benefits by restoring the use of stand-alone HRAs that could be used to reimburse employees for qualified medical expenses and/or individual health insurance premiums. It is specifically aimed at those entities not subject to the ACA’s Employer Mandate (i.e. those with fewer than 50 full-time employees) and who do not offer a group health plan to their employees. To qualify, the maximum benefit provided under the plan would be capped at $5,130…or $10,260 if the HRA includes reimbursements for family members.* Employees covered under these arrangements would be prohibited from receiving a subsidies for health insurance purchased under the public marketplaces.**

For eligible employers, this bill would overturn guidance issued by the Internal Revenue Service and the Department of Labor that stated that these arrangements violated the ACA’s insurance market reforms.*** As a result of that previous interpretation, employers who continue to offer stand-alone HRAs today face the potential of a $100 per day, per employee penalty ($36,500 per year).

While it’s a good sign that this bi-partisan legislation passed the House with very little opposition, our work is not done. The measure now goes to the Senate where a companion bill – S. 3060 – has been introduced by Sen. Grassley (R-IA) and Sen. Heitkamp (D-ND).   Although similar legislation has received opposition in the past from members of the Democratic leadership in that body, we’re hopeful that it will be taken up this fall/winter as part of the year-end agenda.

This a common-sense solution ensuring that small businesses aren’t penalized for trying to do the right thing. HRAs are an affordable solution for both employees and employers to combat the escalating cost of health insurance. Since many small employers do not have human resource departments or benefits specialists, this change would provide them with the necessary flexibility to help their employees pay for health care.

TASC remains a strong supporter of both H.R. 5447 & S. 3060, and we will continue to advocate for their passage throughout the remainder of this Congressional session by engaging with Senators and their staff.

* Indexed for inflation

** H.R. 5447 also establishes a number of notice/reporting requirements and requires that employers report contributions on their employees’ W-2 forms.

*** Notice 2013-54 (dated Sept. 13, 2013)

2017 HSA Limits

Revenue Procedure 2016-28 essentially status-quo

Yesterday, the IRS provided the inflation adjusted deduction limitations for annual contributions made to a HSA under Section 223 of the Internal Revenue Code. These amounts are updated annually to reflect cost-of-living adjustments.  

Contribution Limits                                                                                                         Self-only coverage = $3,400 (an increase of $50)                                                    Family coverage = $6,750*

High Deductible Health Plan (HDHP)                                                                                A HDHP is defined as a health plan with an annual deductible not less than $1,300 for self-only coverage or $2,600 for family coverage, while annual out-of-pocket expenses may not exceed $6,550 (self-only) or $13,100 (family).*

*Unless noted, the amounts are unchanged and reflect current 2016 levels.

 

Hatch, Paulsen Introduce Bill to Enhance HSAs, FSAs

Legislation Aims to Ease the Burden of Rising Health Care Costs*

Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways and Means Committee member, Erik Paulsen (R-MN) recently introduced the Health Savings Act of 2016, which seeks to simplify and expand HSAs and FSAs.

Created to give Americans control over their personal health care spending, these plans have grown in popularity despite needing critical updates to match our changing health care system. For example, when HSAs were first made available back in 2003, these plans only covered 454,000 lives. Today, 19.7 million individuals are covered under a health plan that is HSA-eligible.

Among other things, the comprehensive legislation clarifies that individual employees’ contributions to HSAs and FSAs should not be counted toward the calculation of the Cadillac Excise Tax. Some additional highlights include:

HSA catch-up contributions (spouses)                                                             Current law allows HSA-eligible individuals age 55 or older to make additional catch-up contributions each year. However, the contributions must be deposited into separate HSA accounts even if both spouses are eligible to make catch-up contributions. This section would allow the spouse who is the HSA account holder to double their catch-up contribution to account for their eligible spouse. 

Prescription and Over-the-Counter Med. Allowance                                              The bill stipulates that a reimbursement of expenses incurred for any prescription or over-the-counter medicine or drug shall be treated as a reasonable medical expense. 

HSA Interaction                                                                                                      The HOPE Act of 2006** allowed employers that offered FSAs or HRAs to roll over unused funds to an HSA. However, unused FSA funds could not be rolled over to a HSA unless the employer offered a “grace period” (instead of the usual Dec. 31 “use or lose”). Furthermore, the amount to be rolled over was prohibited from exceeding the amount in said account as of Sept. 21, 2006 – effectively limiting most employees from accessing/utilizing these unused funds in order to help seed their HSAs. This section provides employers greater opportunity to roll-over funds from employees’ FSAs or HRAs to their HSAs in a future year in order to ease the transition.

TASC is dedicated to maintaining/expanding employee benefit programs on a tax-advantaged basis, and we applaud Congress’ recognition of the importance of enhancing access to health-based accounts. These tools provide a means of financing evolving health care needs and services, helping American families save for and manage their medical expenses. (Note: On average, FSA and HSA Participants are middle class families…meaning, they earn roughly $57,000 per year, which is less than 300% of the federal poverty level).

Full text of S. 2499 / H.R. 4469:                      https://www.congress.gov/114/bills/s2499/BILLS-114s2499is.pdf

*Health care costs are expected to rise by an average of 5.8% annually between now and 2024.

**Public Law 109-432

Obama’s Budget Proposal Tweaks Cadillac Tax

Administration’s outline also has a potential impact on Flex Plans

Last week, the Obama Administration released its (final) budget proposal for the 2017 fiscal year. And although presidential budgets are usually viewed as highly partisan documents, there are a few noteworthy provisions in this particular budget proposal that will be of interest to TASC Providers / Clients.

Cadillac Tax Changes                                                                                                   As ACA supporters attempt to ease the opposition toward this controversial policy item, which is unpopular with both political parties,* the administration is backing what they’ve dubbed “sensible improvements” in an effort to decrease the likelihood that employer plans will trigger the excise tax.

Health plan costs by geographic regions                                                                   Under the proposal, a health plan would be considered high cost and subject to the tax if it exceeded the greater of the current law threshold ($10,200 for individual coverage and $27,500 for family coverage) or a new “gold plan average premium” which would be determined/calculated and published for each state.** A family multiplier would be applied to this amount to create the family threshold. This reform is intended to protect employers from paying the tax only because they are in high-cost locales and ensure that the penalty remains targeted at the appropriate population (i.e. those with overly generous plans).

GAO study                                                                                                                     The President’s budget also requires that the Government Accountability Office (GAO) study the potential effects of the excise tax on entities with unusually sick employees…presumably leading to legislative measures if the study finds that such firms are adversely impacted.

FSA salary reduction                                                                                            Currently, each employee’s actual FSA salary reduction contribution is counted in determining whether the cost of coverage for that employee exceeds the limit and is subject to the excise tax. But under the new recommendations, employers would determine the average amount of FSA salary reduction contributions for similarly situated employees and use that average amount in determining the cost of coverage.

Elimination of Dependent Care FSAs                                                                          As part of the administration’s attempt to increase the child and dependent care tax credit and create a larger credit for taxpayers with children under the age of 5, dependent care FSAs would no longer be permitted.  The executive branch believes that the new credits would provide better assistance to families with children then is currently available through a dependent care FSA.

Of course, the budget request of a president in his final year in office – particularly one facing a hostile Congress – is unlikely to lead to enacted legislation. That said, this proposal at least offers an insight into some of the interesting options that the next president might pursue, depending on his/her political leanings.

Overall, these provisions simply fall short of the mark and do not address TASC’s core concerns; in fact, they seem to be just as – if not more – administratively complex than the rule it attempts to replace. While we appreciate recognition of the budget’s implicit acknowledgment that the excise tax is imposed inequitably on those who live in high-cost geographic areas, this adjustment completely disregards the other uncontrollable factors that are used to calculate the tax, as well as the detrimental effects the tax could have on employer-sponsored health care plans.

The Cadillac Tax does nothing to help reduce the cost of health care or improve its quality. Instead, it places unparalleled financial challenges on employers, siphoning off resources that otherwise could sustain or improve benefits for workers and their families. Therefore, TASC continues to support full repeal of the tax or at the very least a carve-out exempting contributions to FSAs, HRAs and HSAs from the tax’s calculation. 

* Clear bipartisan majorities of both the House and Senate have voted to repeal the tax, and ALL presidential hopefuls – including both Democratic candidates – have also publicly called for repeal.

** A “gold” level plan is a tier of coverage found on a state-based or federally-facilitated public marketplace; would be calculated based on a weighted average of the lowest cost (self-only) silver level plans, multiplied (by 8/7) to simulate the cost of an actuarially equivalent gold plan.