Benefits brokers who want to address the needs of small-business owners have a new option, courtesy of the Small Business Healthcare Relief Act.
That law, which enjoyed vast bipartisan support on Capitol Hill, was a rider to the 21st Century Cures Act, passed in the waning hours of the 114th Congress in December.
The bill allows employers under the 50-life threshold of the Affordable Care Act’s employer mandate to offer standalone health reimbursement accounts.
William Sweetnam, legislative and technical director for the Washington, D.C.-based nonprofit Employers Council on Flexible Compensation, says the new relief for small employers was unexpected, albeit welcomed, news. The group advocates for the expansion of tax-advantaged benefits solutions for employers.
“The-small business community has really been pushing for regulatory relief on standalone HRAs,” Sweetnam said.
“Even though there were several pieces of legislation introduced in the past couple of years, no one saw this coming as part of the Cures Act,” he says. “It just wasn’t on a lot of people’s radar at the end of year.”
Sweetnam was a key architect in the formation of HRAs and such tax-advantaged benefit options as health savings accounts. When the IRS amended the tax code in 2003 to allow new options for employers, he served as the lead tax policy official for employee benefits at the Treasury Department.
Since then, employers of all sizes have used HRAs to help workers fund qualified out-of-pocket medical expenses, including the cost of medical premiums for plans purchased outside the workplace.
Employers can deduct account contributions, which have a tax advantage over simply offering more cash compensation to employees in order to curtail medical expenses.
Employees also receive income in nontaxed accounts. Sweetnam, like other proponents of tax-advantaged benefit solutions, calls them a “win-win” for both employees and employers.
Before the ACA was passed, employers used HRAs in tandem with high-deductible major medical plans. But the code also allowed HRAs to be offered independently of a major medical plan – something that distinguished them from HSAs.
Brokers could market that strategy to employers that couldn’t afford a high-deductible core medical plan – and help cash-strapped small businesses mitigate the competitive disadvantage of not sponsoring a major medical plan. Approximately 22 percent of businesses with fewer than 10 employees sponsor a group plan, compared with about 96 percent of firms with more than 50 employees, according to the Employee Benefits Research Institute.
In 2013, regulators issued guidance that the ACA’s annual and lifetime limits prohibition applied to HRAs, as well, effectively prohibiting employers from offering them as a standalone feature.
The guidance extended to employers with less than 50 full-time employees that are also not required to offer group plans under the ACA.
To make matters more difficult, small employers that used HRAs without a qualified plan faced significant fines — up to $100 per day, per participant. That could mean a $146,000 excise tax for an employer of four that operates a standalone HRA for one year.
“A big problem among small businesses is that a lot of employers continued to offer standalone HRAs without realizing they were out of compliance,” Sweetnam said. Other employers that were aware of the Treasury and Labor departments’ guidance on HRAs chose to stop offering the accounts, leaving their employers with less compensation for medical benefits and costs.
That all changes with the Cures Act, which creates a new HRA, coined the term “qualified small employer health reimbursement arrangement,” or QSEHRA.
Employers can fund up to $4,950 for individuals and $10,000 for families under the new accounts.
Brokers will have to keep certain restrictions in mind. Employers, for one, will still have to fall under the 50-employee threshold to use the standalone HRAs. And employers will not qualify for the new accounts if they already offer a group plan to any of its employees, according to language in the new law.
Under the accounts, employers can create a customized reimbursement plan from a long list of qualified services.
The law says that employers must fund every employee’s HRAs under the same terms. But it also includes language that allows employers to provide different levels of funding depending on the cost of individual insurance premiums.
Since the ACA was introduced, enterprising benefits brokers have used HRAs to help employers comply with their mandate, says Sweetnam.
The new QSEHRA option creates a potential competitive opening for brokers serving businesses that are not required to offer coverage, he said.
“If you are a smart broker, this is something you are going to look at help build business with small employers,” said Sweetnam.
While the law creates new flexibility for small employers, Sweetnam says the option comes with a new set of complications.
“It’s a double-edged sword for employers,” he says “Setting up HRAs can be complicated for small businesses with limited internal resources. And there will be new compliance requirements.”
That reality underscores the value brokers can deliver, says Sweetnam.
One of the new law’s key provisions requires employers to verify that their workers have purchased, under the ACA’s individual mandate, a qualified plan with minimum essential coverage. Lawmakers designed the regulation to ensure it did not create a cash incentive for younger lives to leave the individual market’s risk pool.
If a worker purchases health coverage without minimum coverage, then the QSEHRAs’ reimbursements may be taxed as regular income.
Employers will also have to document on W-2 forms the dollar amount reimbursed to employees, even though it won’t be treated as taxable income.
For employees who qualify for subsidies on the insurance exchanges, employers will want to communicate certain ramifications with workers. Those subsidies will be reduced by an amount equal to the employer’s account contribution. So if a worker qualifies for $1,500 in annual subsidies and then receives a $1,000 distribution, their subsidy will be reduced to $500.
Employers will also have to provide written notice to workers 90 days before the plan year begins. For 2017, that date has been extended to March 13, or 90 days after the law’s enactment.
Those that fail to provide adequate notice can be fined up to $2,500 a given calendar year, according to the law.
For more than two decades, the National Federation of Independent Business has surveyed the pain points of small business owners. Year after year, respondents said their No. 1 problem was the costs and complications of providing health care.
EBRI data show that group health plan offer rates have dropped since 2009. For employers with fewer than 10 workers, it dropped from about 36 percent in 2008 to 23 percent in 2015; for employers with 10 to 24 employees, it dropped from 66 to 49 percent.
That the new QSEHRA resulted from small employers’ calls for regulatory relief indicates a desire to get affordable protections for workers, even when those employers don’t have the means to fund a major-medical option.
That could make more small business owners receptive to offering voluntary options.
Vision, dental, and some other voluntary offerings can be paid with QSEHRA dollars.
Communicating the value of affordable voluntary options along, with the new HRA option, could prove to be a valuable move for small businesses that want to deliver the most options to their workers.
Any immediate uptake among the nation’s small-business community remains to be seen. Some may simply be waiting for what will become of the ACA’s employer mandate under a Trump administration.
For the time being, the ACA remains the law of the land, says Sweetnam, who said he expects the new regulations on standalone HRAs to be featured in Republicans’ proposed reforms.
In the meantime, workers can benefit from the new regulation, Sweetnam says -- but not without a commitment from employers and committed support from the brokerage community.