Under a new law signed on December 13, 2016, small employers (less than 50 employees) are now able to offer Health Reimbursement Arrangements (HRAs) to employees without being required to also offer health insurance in 2017 to the same employee. This allows a qualifying small business to reimburse amounts for medical expenses (including health insurance premiums) to employees who have purchased their own insurance, and the new law allows this without the employee needing to be on the company’s group insurance plan. The new law goes into effect January 1, 2017.
By reimbursing employees through an HRA, the employees do not have to pay tax on the company’s health reimbursement amount, and the company is not required to pay payroll taxes on the reimbursement. Employers who have reimbursed their employees through an HRA before January 1, 2017 will not be subject to the $100 a day penalties that were owed before the recent legislation was passed.
There are certain requirements the HRA must meet, and there is a limited amount that an employer can give to their employees ($4,950 for individual insurance, $10,000 for a family plan). To receive tax free reimbursements for qualifying medical expenses, the employee must have insurance that meets the minimum essential coverage requirements. The company cannot offer a separate group plan and the reimbursement must be available to all eligible employees. Only the employer can fund the HRA; the employer cannot do this via salary reduction contributions.
Employees should also note that when they receive these reimbursements from their employers for qualified medical expenses, their premium tax credit will be reduced. The amount of benefit received by the employee will be reported on their W2.
This is a brief summary of very recent change to a complicated tax law and should not solely be relied upon to make a decision. Please speak with a tax professional for more detailed information.
Jonathan T. Stoller, CPA & Andrew S. Manz, CPA
Bashore Reineck Stoller & Waterman Inc