Small Employer HRA
Overview
Small Employer: Fewer than 50 Full-Time Equivalent Employees
Maximum Reimbursements:
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2024 Single Individual: $6,150
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2024 Family: $12,450
Reimbursements Excluded from income
Related IRC and IRS Publications and Forms
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21ST Century Cures Act
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Sec 9831
The “21st Century Cures Act” (H.R. 34), passed in late 2016, included a provision allowing small employers to reimburse their employees under a health reimbursement arrangement (HRA) for medical expenses without being liable for a $100 per day draconian penalty (IRC Sec 4980D) for violating the Affordable Care Act (ACA)’s rules.
Effective January 1, 2017, qualified small employers with an average of fewer than 50 full-time employees (including full-time equivalent employees) that maintain a qualified small employer HRA will be exempt from the penalty. Under the Act, a qualified small employer (as defied in IRC Sec 4980H(c)(2) is one that:
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Employs an average of fewer than 50 full-time employees (including full-time equivalent employees) and does not offer a group health plan to its employees (IRC Sec 9831(d)(3)(B)). The number of full-time equivalent employees is determined by adding up all the hours worked by part-time employees for a month and dividing by 120.
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Provides the HRA on the same terms to all eligible employees (IRC Sec 9831(d)(2)(A)(ii)). Eligible employees (IRC Sec 9831(d)(3)(A)) are any employees of the employer except:
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Those who have not completed 90 days of service.
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Those who have not attained the age of 25.
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Part-time workers (generally those working an average of less than 30 hours per week).
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Seasonal workers (generally those employed for 6 months or less during the year).
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Employees covered by a collective bargaining unit.
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Certain non-resident aliens.
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Entirely funds the HRA (no salary reduction contribution may be made under the HRA). (IRC Sec 9831(d)(2)(B)(i))
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Only reimburses the employees after being provided proof of their medical expenses before being reimbursed. (IRC Sec 9831(d)(2)(B)(ii))
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Limits reimbursements in 2023 to $5,850 ($11,800 where the plan includes family members) per year., Amounts are subject to inflation adjustments (IRC Sec 9831(d)(2)(B)(iii)). See table above for limits for other years., For employees who are covered for less than a full year the dollar limits are prorated. (IRC Sec 9831(d)(2)(D)(i))
The medical expense reimbursements that an employee receives from a qualifying HRA are excluded from the employee’s income.
Pre-Regulations Q & A’s and Final Regs
The IRS issued Notice 2017-67 that provides guidance, effective for plan years beginning on and after Nov. 20, 2017, in question-and-answer format on the requirements for providing a qualified small employer health reimbursement arrangement (QSEHRA), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees. Topics covered include eligible employers, eligible employees, same terms requirement, the statutory dollar limit, written notice requirement, the minimum essential coverage requirement, reimbursements, reporting, and coordination with the premium tax credit and health saving account requirements. The IRS, in mid-June 2019, finalized regulations, TD 9867, based on this guidance, which generally applies for plan years beginning on and after January 1, 2020
California Differences
California does not conform to IRC section 9831, which provides for general exceptions to group health plan requirements (FTB’s Summary of Federal Income Tax Changes 2016).