While NFIB continues to push for major health care reform legislation, it is easy to overlook the 21st Century Cures Act—which contained an important victory for small business. Previously NFIB had to warn small business owners that they faced significant penalties from the Internal Revenue Service if they provided any direct payments or reimbursement payments to an employees’ individual (nongroup) market health insurance plan. But with the 21st Century Cures Act, small business owners are allowed some wiggle-room to help their employees, even if they are unable to offer Affordable Care Act (ACA) compliant group health insurance policies.
Here is an overview. First let’s start with a topline summary of what small business owners need to know about the Affordable Care Act. Then we’ll go on to explain Qualified Small Employer Health Reimbursement Arrangements.
The ACA’s Employer Mandate
Employers with 50 or more full-time employees or full-time equivalents are required to offer “affordable” health insurance to their full-time employees—meaning that the employee’s premiums cannot exceed approximately 9.5% of his or her household income. (The measure of “affordability” is adjusted slightly on an annual basis. For 2017, the affordability threshold is actually 9.69% of an employee’s income. For 2018, the affordability threshold will go down to 9.56% of an employee’s income.) Smaller companies have no obligation to provide health insurance at all. Here are some helpful notes:
• An employee is considered “full-time” if he or she works 30 hours or more per week or 130 hours or more per month.
• Since many employees work variable hours from week to week, employers may “look back” three to twelve months to see how many hours each employee has worked over the past several months on average.
• For example, many companies use a “look back period” of six months. If Jan averages 20 hours per week in January – April, and 40 per week in May – June, she would average 26.6 hours over that six-month period and would be categorized as a “part-time” employee. By contrast, if Mark works 40 hours per week January – May and then drops to 10 hours per week in June, he would qualify as a “full-time” employee because his six-month average would be 35 hours per week.
• A company’s “full-time equivalent” number is determined by adding-up all hours worked by part-time employees over the last six months and dividing that figure by 120. Thus, if a company has 3 part-time employees working in total 180 hours over a six-month period, it would have 1.5 full-time equivalents. That usually matters only where the employer is close to the Employer Mandate’s 50 employee threshold.
Prohibition on Annual and Lifetime Benefits
With enactment of the ACA, many small business owners have seen their small group health insurance premiums increase dramatically. As detailed in this PBS Newshour special, many small business owners have been forced to drop their health insurance coverage entirely—forcing their employees to fend for themselves. And, unfortunately, that means that their employees often end up paying more for health insurance on the individual market.
Of course, employers typically want to help their employees with health insurance costs—even if they can’t afford to provide group coverage. But the IRS took the position that any offer to pay a set amount toward health expenses violated the ACA’s prohibition on lifetime or annual caps on insurance coverage. And while we’ve argued that this is an inappropriate interpretation of the statutory text, the IRS has nonetheless continued with this construction of the Act—meaning that, unless a business qualifies for the exception outlined below, employers are generally prohibited from offering health insurance reimbursements.
The 21st Century Cures Act and Small Business Health Care Relief
The good news is that with enactment of the 21st Century Cures Act, Congress amended the ACA to allow “Qualified Small Employer Health Reimbursement Arrangements.” Specifically, this allows employers with fewer than 50 full-time or full-time equivalent employees to reimburse employees for their health insurance premiums and qualified medical expenses if the company does not provide a group health insurance plan. Here is how it works:
• Proof of Insurance Coverage. To qualify for reimbursement, employees must provide employers with proof that they have obtained qualified health insurance.
• Reimbursement Caps. Reimbursements may be no greater than $4,950 for an individual employee, or $10,000 for his or her entire family. (Those figures will be adjusted for inflation annually).
• Reimbursement Uses. Eligible employees may obtain reimbursement either for health insurance premiums, or for medical care as defined by Section 213(d) of the ACA.
• Prorated Coverage. If an employee has insurance for only part of the year, then the amount to which he may be reimbursed must be prorated proportionally. For example, while an eligible employee may qualify for prorated coverage of up to $10,000 for his or her family, the employee would only qualify for a $7,500 reimbursement if he or she lacked coverage for three months in the calendar year.
• Stipulated Terms. Employers may stipulate terms for when they will provide reimbursement and up to what amount. Employers may also require an employee to work up to 90 days to be eligible; however, employers must provide the same terms to all eligible employees.
• No Wage or Salary Deductions. Health care reimbursements must be funded solely by the employer, and cannot be deducted from the employee’s paycheck.
• No Double Benefit. If an employee is eligible for a premium tax credit on the individual exchange marketplace, the premium tax credit will be reduced by the amount of the employer reimbursement. For example, if an employee is eligible for a $1,000 premium tax credit on the individual exchange marketplace and an employer offers $250 in reimbursement, the premium tax credit will be reduced to $750 ($1,000 – $250).
• Reporting. Employers must report the total amount of the permitted reimbursement on an employee’s W-2. And employees must report the amount of their total reimbursement eligibility when applying for a premium tax credit through an exchange marketplace.
The IRS Notice Requirement
Importantly, employers must also provide written notice to their employees. The notice must be given 90 days before the beginning of the year in which the health reimbursement plan will be offered, or 90 days from when the employee is first eligible. Failure to provide adequate notice will result in a $50 tax for each incident for good faith mistakes; however, there is a cap of $2,500. The notice must specifically provide:
• The amount that the employee will be eligible for reimbursement;
• A statement that the employee should provide this information to any exchange to which he or she applies for health insurance coverage; and
• Explanation that the employee is required by the ACA to have health insurance, and a warning that reimbursements will be included in the employee’s gross income if he or she is without coverage.