A Health Reimbursement Arrangement is an account funded by an employer to reimburse employees for medical care expenses. In the past, these arrangements have also been available to reimburse employees for purchasing their own private health insurance in lieu of having a company plan. In light of Obamacare, an important question arises: Does an Employer Funded Health Reimbursement Arrangement to reimburse an employee for purchasing private coverage on the individual market comply with the new regulations?
The Internal Revenue Service has issued new guidance under “Technical Release 2013-03”, clarified in Notice 2013-54, and the answer is no. An employer cannot establish a Health Reimbursement Arrangement for employees to purchase coverage on the individual market under these arrangements as such a scheme will fail to comply with the annual dollar limit prohibition.
A Health Reimbursement Arrangement sponsored by an employer may be set up if it is integrated with employer provided coverage that complies with Obamacare. In other words, an employee must have an Obamacare-compliant health plan first; a Health Reimbursement Arrangement can only supplement it. What this does is puts non-integrated HRA plans out of compliance.
As a result of this odd regulation, if you have less than 50 employees and no health insurance plan there is no penalty. If you have an integrated HRA where you provide a company health insurance plan, there is no penalty. If you have a non-integrated HRA designed to reimburse employees for purchasing their own private health insurance plans, then you are non-ACA compliant and will face a penalty of up to $100 per employee per day.
As we’ve learned with ACA implementation, nothing is set in stone. This very same $100 per employee per day penalty for non-compliant plans was arbitrarily waived last year contrary to the written legislation. It’s very possible that the HRA glitch will also be waived or changed before the end of the year, especially if the IRS hears from enough concerned parties.
Health insurance reimbursements for S Corp shareholder private plans are still OK and should be reported on your W-2 in boxes 2 and 14. Additionally, employers can reimburse employees for private health insurance plans outside of a Section 105 HRA plan, but must include those reimbursements as additional payroll wages to the employee and withhold appropriate taxes.
If you have any questions or need further guidance please do not hesitate to contact us.