One of the most pressing issues for small business owners is how to give employees access to quality healthcare without breaking the bank. Since the Affordable Care Act (ACA) took hold, employers saw the options for providing affordable healthcare to employees diminish. Many small employers saw reimbursements, taxable as compensation to the employee, as the last available avenue to reimbursement employees for healthcare costs. The good news is an old healthcare option with a new twist was revived in December which will give business owners reason to celebrate 2017.
In December, President Obama signed the 21st Century Cures Act. The Act was mostly a medical research bill but tucked away within the act was…..
A revival of the health reimbursement arrangement (HRA)!!
Beginning on January 1, 2017, the Act allows small companies (under 50 full-time equivalent employees) to use HRAs to reimburse employees who buy their own health insurance pre-tax.
For employees – Pre-tax means the reimbursement under the HRA are not only exempt from federal and state tax but from FICA taxes as well. Payments exempt from tax lower your reportable W-2 wages which can have all kinds of other good effects on your tax return.
For employers – The reimbursement is exempt from the employer portion of FICA, creating a tax savings for the company and a nice employee benefit.
The HRA was revived with new conditions that encourage employers to offer health insurance so here’s the catch:
- The company can’t offer a group plan to any employees and the HRA must be offered to all employees with some exclusions for part-time workers and employees under 25 years old.
- Employers can vary the amount of reimbursement based the employee’s cost of the insurance policy. For example, higher costs because of the employee’s age or family size can be taken into consideration.
- New coverage limits have been placed into effect limiting coverage to $4,950 for a single worker and $10,000 for workers with families. These amounts will be adjusted for inflation in the future.
- The HRA payment amount is deductible by the employer and non-taxable to employee ONLY if the employee has health insurance. The payments can be used to cover copays, deductibles, insurance premiums and uncovered healthcare costs. Payments to employees that don’t have health insurance will be considered taxable payments to the employee.
- The favorable tax benefits of HRAs have important interactions with Health Savings Accounts (HSAs) and premium tax credits for health insurance purchased through the health insurance exchange. You are not allowed to “double-dip” on the tax advantages provided by different types of plans.
Hurry! For coverage initiated in 2017, the employer may provide the employee notice by March 13, 2017, 90 days after enactment of the new law. Employers that are looking to make qualified small employer health reimbursement arrangement (QSEHRA) should contact an employee benefits firm that can assist in plan implementation. There are many facets of this new law which need to be reviewed carefully depending on your specific situation. For an understanding of how the new law will affect your tax situation, we are here to help.
For an understanding of how the new law will affect your tax situation, we are here to help.