Written by The Business Journal Staff
Previously, this option was not allowed under the Affordable Care Act (ACA), but in an effort to ease the burden on businesses, President Obama signed the 21st Century Cures Act in mid-December 2016. The legislation included a provision allowing companies with fewer than 50 full-time equivalent employees to reimburse employees for purchasing individual health insurance.
Local health insurance broker Victor Gunderson of Der Manouel Insurance Group said this gives small employers who are not subject to the ACA’s employer mandate a way to contribute to their employees’ health insurance premiums via a tax deferred Health Reimbursement Arrangements fund. The option, he said, is ideal for very small employers or brand new employers who can’t afford to offer a small group plan.
“It’s good for the small employer with five or six employees in a shop or a new employer that can’t afford to offer a group plan, but wants to contribute some money to their employees for health expenses,” Gunderson said.
“Setting up an HRA allows them to put aside some funds for reimbursing health expenses. Before, these businesses could only have an HRA tied to a group plan, and it could only be used to reimburse for doctor’s visits and care, not for premiums, so employers without a plan couldn’t have an Health Reimbursement Arrangements under the ACA. Now, they can, and those HRA funds can go toward reimbursements for care or premiums.”
The main benefit of the HRA is neither employer or employee have to pay payroll tax on the contribution, as they would if the employer simply chose to give their employees a raise in lieu of offering health benefits, which some small employers have opted to do in the past.
Also, unlike traditional health plans, employers aren’t stuck having to pay a portion of premiums on a plan their employees may or may not be using. Instead, employees choose a plan that works best for them and they can choose to use the employer’s contribution toward their premium or toward other health care expenses. Some employers can even opt to make dental and vision care expenses reimbursable as well.
The key, Gunderson said, is that all employees have an equal amount available to them that, according to the law, can only fluctuate based on an employee’s age and family size.
According to the provision, the maximum a small employer can set aside is $4,950 for an individual employee’s plan, or $10,000 for a family plan. If, for some reason, an employee doesn’t use the full amount allotted for their health expenses, Gunderson said the employer gets to keep any amount leftover.
While the HRA option gives small employers wiggle room, Gunderson said if employers can swing the cost, offering a small group plan is still the way to go.
“For most employers, it is better to get a group plan because the premiums are tax deductible, plus the employee share that comes from their payroll is also tax deferred,” Gunderson said. “The HRA is really just a good option for small employers who can’t afford a health plan, but want to contribute a few hundred dollars to their employee’s plans.”