Reimbursing Employees for Healthcare

The IRS says that Health Reimbursement Arrangements (HRAs) and medical reimbursement plans do not comply with the provisions of the Affordable Care Act (ACA).

Non-Compliant Plans

An HRA is an arrangement whereby an employer funds an account for its employees and the employees are reimbursed for qualified medical expenses, up to a maximum amount, tax-free. A medical reimbursement plan, or employer payment plan (EPP), is an arrangement where an employer reimburses an employee for health insurance premiums for an individual plan or pays the employee’s individual premiums directly to the insurance company.

The ACA does not allow a group health plan to limit medical benefits, making both an HRA and EPP non-compliant. Furthermore, the ACA requires that plans provide certain preventive care services without sharing costs, which an EPP fails to do. A group health plan that fails to meet the  requirements of the ACA may be subject to an excise tax of up to $100 per employee, per day. This adds up to $36,500 per employee for a year of non-compliance!

A group health plan is a plan that has no less than two participants who are current employees to which the employer contributes. Therefore, if only one employee is covered under the HRA or EPP, the plan should not be subject to the excise tax.

But, the ACA rules only apply to employers with more than 50 employees, right? Unfortunately, this is not the case. The “large employer” rules only apply to insured plans. HRAs and EPPs are considered to be self-funded plans. Therefore, even small businesses are subject to these rules.

Complying with the Rules

What should you do if you have previously used these types of plans to fund your employees’ healthcare? There are two options available. First, set up an ACA-compliant health insurance plan. The premiums will be tax deductible to your practice, and your employees will receive the benefit of having health insurance coverage.

If supplying health insurance is not a viable option for your practice, there is another option. You may give each employee a pay raise to replace the benefit previously received from the HRA or medical reimbursement plan. The employees can then use the money to purchase their own health insurance, if they like. You cannot require your employees to purchase insurance with the money or it will be considered an arrangement to provide medical coverage and will fall back in the EPP classification.

Note: If you offer an ACA-compliant plan, but have an employee that elects to be covered on a spouse’s plan rather than your plan, you may reimburse that employee for that coverage without being subject to the penalty. This is because the reimbursement is to pay for ACA-compliant employer plan premiums.