Congress Eliminates IRS Penalty on Employer Reimbursements for Health Insurance

The most popular post on my blog has always been the one explaining that HRAs (Health Reimbursement Arrangements) were no longer legal (as of mid-2015).  Well… that’s all changed.

The Senate passed legislation Wednesday eliminating a tax penalty on employers who reimburse employees for the cost of health insurance premiums, following passage of the measure last week in the House.

Source: Congress Eliminates IRS Penalty on Employer Reimbursements for Health Insurance

President Obama has already signed it into law, and it goes into effect January 1st.  Joe Biden’s really excited about it.

Title 18 of the new law, originally a separate bill called the Small Business Healthcare Relief Act, allows companies to use Health Reimbursement Arrangements to compensate employees who buy their own insurance.

Source: New Law Eases Small Business Health Care Burden

Health reimbursement accounts, or HRAs, are more simply recognized as the practice of reimbursing employees for the cost of their health insurance.  The reason they were made illegal with the advent of the ACA makes sense — an employee might have a personal tax situation whereby they can get Marketplace health insurance subsidized by the government, and it’s cheaper for the employer to simply reimburse the employee for that insurance than for the employer to provide an insurance plan. However, that’s unfair to the rest of us, whose tax dollars go to paying for that subsidy.

Previously, stand-alone HRAs were considered noncompliant under federal law. Beginning in 2014, a joint notice from the Departments of Labor, Health and Human Services, and the Treasury subjected employers using these noncompliant plans to fines of up to $36,500 per employee per year.

Source: The SBHRA Heads to the White House—What It Means for Small Business

Apparently that inequity no longer matters.  The IRS fees were seen as exorbitant, and Congress saw that it was hurting small businesses, who may not have been trying to game the system — they simply did not want to take on the administrative headache of offering health insurance when they weren’t required to do so.

Please spread the word to your small business accounting clients or friends/colleagues who own businesses and have employees.

UPDATE 3/4/17 — IRS Notice 2017-20 extends the period for an employer that provides a qualified small employer health reimbursement arrangement (QSEHRA) to furnish a written notice to its eligible employees. The period is extended to at least 90 days after additional guidance regarding the contents of the QSEHRA notice is issued. The notice also provides transition relief from penalties for failure to furnish the written notice until after further guidance has been issued.

For more info on what qualifies as a QSEHRA, see the Department of Labor Q3 on page 5 of their FAQ released 12/20/16.

(In other words, hang tight — the how-to’s are still to come.)

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