New Opportunity For Stand-Alone HRAs

The 21st Century Cures Act, signed into law in the waning days of the Obama administration, provides funding for cutting-edge medical research and other improvements in the health care system. But it also allows small businesses to offer stand-alone "health reimbursement arrangements" (HRAs) to their employees.

An HRA provides special accounts for health care expenses, much like health care flexible spending accounts (FSAs). Unlike FSAs, however, HRAs are funded solely by employer contributions, rather than by payroll deductions from employees. Contributions are exempt from taxes, as are distributions for qualifying health care expenses.

Funds in an HRA may be used for co-payments, deductibles, and co-insurance, as well as for regular doctor and hospital visits. Frequently, an employer will pair an HRA with a high-deductible health insurance plan.

The rules for HRAs were complicated by the 2010 Affordable Care Act (ACA), which soon might be changed substantially or repealed. Under the ACA, employers with 50 or more full-time or full-time equivalent employees (FTEs) must provide minimal essential health insurance to employees or face substantial penalties. Other ACA provisions involving limits and restrictions for "group health plans" effectively barred stand-alone HRAs for smaller businesses.

But now the Cures Act authorizes the use of stand-alone HRAs if five key requirements are met:

1. The plan is maintained by an "eligible employer" that has fewer than 50 employees. The employer can't offer another group health plan to any of its employees.

2. The plan is funded solely by employer contributions. Salary reductions aren't permitted.

3. The HRA is available to all eligible employees under the same basic terms. But certain workers may be excluded, including those with less than 90 days of service and part-time and seasonal employees. Also, reimbursements may vary in different geographic areas, within certain parameters.

4. The maximum annual contribution is $4,950 per year for an HRA covering only the employee and $10,000 for an HRA covering a worker's family. These amounts will be indexed for inflation.

5. The plan must provide payment or reimbursement for medical care expenses, including premiums for individual health insurance. Employees must provide documentation of services to receive payments.

The new law also coordinates these new rules for HRAs with other parts of the ACA. For instance, it prevents employees from claiming a tax credit for a health insurance premium in an exchange for any month in which they are provided HRAs with affordable coverage. Finally, the law specifies reporting and notification requirements for employers.

This article was written by a professional financial journalist for G.W. Sherwold and is not intended as legal or investment advice.

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