Health Reimbursement Arrangements
The IRS has issued guidance indicating that health insurance reimbursement arrangements (HRAs) that do not comply with the Affordable Care Act (ACA) are subject to severe penalties.
An HRA is an arrangement where the employer reimburses the employee for part or all of the employee’s medical care expenses. In general, the IRS makes it clear that HRAs, HSAs and most other pre-tax arrangements that reimburse insurance premiums and medical expenses are “nonqualifying”. Nonqualifying arrangements are subject to penalties as high as $100 per day per individual. Although this was effective January 1, 2014, the IRS has provided for transitional relief for small employers through June 30, 2015. Employers not in compliance after this date may be subject to the above penalties.
Some of the more common HRAs are as follows:
- Medical reimbursement plans or HSAs without an employer (or spouse’s employer) group health plan
- Reimbursing employees for their health insurance (should increase taxable wages instead)
- Employers paying for and deducting only the owners’ health insurance.
Note that this applies to SMALL employers – those with two or more employees. (Small employers are still not required to provide health insurance to their employees. However, employers should be aware of the potential pitfalls of HRAs.)
2015 Reporting Requirements
In addition to reporting health benefits on Form W-2 (for employers who issued more than 250 W-2s in the prior year), there are additional reporting requirements beginning in 2015. Under these requirements, employers and insurers must compile monthly information on health coverage they offer and report this to the IRS and the covered individuals. Under section 6055, the first requirement, “minimum essential coverage” (MEC) must be reported for self-insured plans with fewer than 50 full-time employees.
Applicable large employers must report health care coverage under Section 6056. (An applicable large employer has an average of at least 50 full-time employees, including equivalents, during the year.)
Under each requirement, an employer must file a Form 1095 for each employee, similar to a W-2. This must be furnished to the employee and to the IRS, along with a summary form. The 1095 lists each person in the household covered by the insurance and the monthly premium amounts.
Transition rules give employers with less than 100 full-time employees an additional year before penalties apply. These employers must still file the required form for 2015 but will not be penalized for failure to file. This transition relief is only in effect for 2015.