I am glad to see that Health Reimbursement Accounts (HRAs) are coming back.
They should never have gone away. They were, unfortunately, sacrificed to the idiocracy. That crowd would rather have you starve than give you half a loaf.
And henceforce they shall be called Qualified Small Employer Health Insurance Arrangements (QSEHRAs).
They are sorta like the former HRAs, with a couple of twists.
So what are these things?
Simple. I used to have one.
My HRA covered all the medical incidentals: deductibles, co-pays, chiropractor, dental, eyeglasses and so on. One would submit out-of-pocket medical expenses, and the firm would reimburse. There was a ceiling, but I do not recall what it was. The ceiling was fairly high, as my partner had some ongoing medical expenses. The HRA was a way to help out.
Then they went away.
One now didn’t have “insurance.” One now had “plans.”
The demimondes, of course, decided they could tell you what had to be in your “plan.”
Take a nun.
No problem: you had to have contraceptives in your plan.
A 50-year old tax CPA?
No sweat: prenatal care in your plan.
But you don’t need prenatal care.
Stinks to be you.
HRAs were sacrificed to the loudest of the boombots.
You see, an HRA did not “cover” pre-existing conditions. It did not offer “minimum essential” coverage. It also could not do your laundry or fix a magnificent BLT on football Sunday, but those latter limitations were not politically charged.
The HRA did not cover pre-existing. True. It did however pay for your co-pays, out-of-pocket and deductibles, but not – technically – your preexisting. It seems covering existing was just not good enough.
It did not provide minimum essential. True. It was not insurance. It was there to help out, not to replace or pretend to be insurance. But it was sweet to have the extra money.
Too bad. HRAs had to go.
People complained. People like my former partner. Or me, for that matter.
So a compromise was reached. You could have an HRA as long as you matched it with insurance that met all the necessary check-the-box features we were told to buy.
What if you did not provide health insurance? Perhaps you were a small company of 8 people, and insurance was not financially feasible at the moment. Could you offer an HRA (say $2,000) to help out your employees? Something is better than nothing, right?
Well, technically you could.
But there was a fine. Of $100 per day. Per employee.
Let me do the math on this: $100 times 365 days = $36,500 per year.
There goes that $2,000 you could give your employees.
To be fair, the government indicated that they would not enforce these penalties through 2016, but you would have to trust them.
I had this conversation with clients. More than once.
Multiply me by however many tax practitioners across the nation giving the same advice.
How many people lost their $2,000 because of this insanity?
Fortunately, HRAs are back.
In 2017. Sort of.
They will be available to employers with fewer than 50 full-time-equivalent employees.
All employees with more than three years of service must be eligible to participate.
> Employees employed less than 90 days, are under age 25, are part-time or seasonal can be excluded.
Must be funded 100% by the employer.
> Salary reductions are not permitted.
There are dollar limitations ($4,950 if employee-only, $10,000 if family/dependent).
There may be a hitch from the employee side:
- The HRA is tax-free as long as the employee has health insurance.
- The HRA is taxable if the employee does not have health insurance.
COMMENT: I suppose an employer will require proof of insurance/non-insurance before writing the first check. This will tell them whether the HRA reimbursement will be taxable to the employee.
- If the employee is on an Exchange, any subsidy will be reduced by the amount reimbursable under the HRA. This is an indirect way of saying that a purpose of the new HRA is to allow small employers to reimburse employees for individual insurance premiums. Prior to 2017, this act was prohibited under ObamaCare.
Not surprisingly, there will be yet-another-code on the W-2 to report the benefit available under the HRA, but we do not have to worry about it until next year’s (that is, the 2017) W-2.
And they did away with the $100/employee/day/yada yada yada absurdity.
Hey, progress. Back to the way it used to be.
About the author
Steven D. Hamilton is a career CPA, with extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.