Small businesses are now allowed to use Health Reimbursement Accounts (HRAs) without incurring penalties under the Patient Protection and Affordable Care Act (ACA) after the U.S. Senate passed the 21st Century Cures Act (CCA) on Wednesday, Dec. 7. The President signed the CCA into law on Dec. 13, and the new rules will apply to years beginning after Dec. 31, 2016.

In 2010, President Barack Obama enacted the ACA, which among several healthcare reforms, set in place rules for health plans, including HRAs. These plans were popularly used by employers to help control healthcare costs. The ACA restricted how employers were able to use HRAs. The IRS and the Department of Labor took the stance that HRAs did not comply with the market reforms of ACA, since HRAs provide a cap on how much they can reimburse employees. Starting July 1, 2015, employers using HRAs that failed to comply with the market reforms related to group health plans under ACA were subject to an excise tax of $100 a day per applicable employee.

The CCA overrules the IRS position, which concluded that HRA plans are group health plans that fail to comply with the market reforms. To be eligible to offer a qualified small business HRA, an employer must not be an applicable large employer (as defined by the ACA) and must not offer a group health plan to any of its employees.

The CCA defined “group health plan” as not including “any qualified small employer health reimbursement arrangement.” Under the act, a qualified small employer HRA must be provided on the same terms to all eligible employees and funded solely by an eligible employer, and there can be no salary reduction contributions under the arrangement. The HRA must provide for the payment of an eligible employee’s expenses for medical care incurred by the eligible employee or the eligible employee’s family members. The amount of payments and reimbursements under the plan for any year cannot exceed $4,950.

Small business owners should be rejoicing, as this is a significant win for them. For small businesses with fewer than 50 full-time employees, employers may offer standalone HRAs to their staff. Small business employers may also help cover health insurance premiums and out-of-pocket expenses for employees.

Although the law goes into effect for plan years beginning after Dec. 31, 2016, it’s important to note that the CCA does provide transition relief through that date so employers with non-compliant plans will not be penalized.

Chad Wouters, CPA joined Earney & Company in December 2006 and became the tax partner in November 2013.  With an emphasis on strategy and planning, Chad works with his clients all year to ensure the most efficient tax strategies are put into place.  Earney & Company, L.L.P.  is a CPA firm that handles tax compliance, consulting and planning as well as audit and other assurance services.  For more information please visit www.earneynet.com or call (910) 256-9995.  Chad can also be reached at [email protected].