One of small business owners’ most pressing questions surrounding healthcare over the past few years has been this: How can I offer my employees the benefits they want without breaking the law (or my bank account)? And in the years since Obamacare has been with us, the answer to that question has been, “not a whole lot.” Among other things, the ACA made employer payment arrangements impractical, limiting small business’ options for providing health coverage to their employees. That all changed earlier this month.
In early December, President Obama signed the 21st Century Cures Act, an omnibus health bill focusing mainly on medical research issues, but with a gift to small business tucked inside. Title 18 of the new law, originally a separate bill called the Small Business Healthcare Relief Act, allows companies to use Health Reimbursement Arrangements (HRAs) to compensate employees who buy their own insurance. Effective January 1, 2017, companies with fewer than 50 employees (those not subject to the Affordable Care Act’s Employer Mandate) can use tax-advantaged funds to reimburse employees for eligible medical expenses -- individual health insurance premiums, deductibles, copays, and other out-of-pocket medical expenses -- without being subject to the penalties previously set forth under Obamacare. It is a huge step forward in leveling the health benefits field for small businesses.
Three main points to know:
- A company with less than 50 FTE employees can reimburse employees for purchasing individual health insurance as if it were directly paying the premiums on a group health policy. The employee won't have to pay taxes on the company's premium contribution, and the company won't owe payroll taxes on it, either.
- The company cannot offer a separate group health plan, and it must make the reimbursement available on the same terms to all employees, although it can vary the amount the reimbursement based on the employee's age and family size.
- The law limits reimbursement to $4,950 for individual insurance, and $10,000 for a family plan. Those amounts are indexed for inflation.
HRAs are not new, but again, the IRS effectively barred them through stiff financial penalties -- $100 a day, or $36,500 a year, per each affected employee -- unless they were tied to an existing group health plan. The opposite is now true. A company’s HRA can stand alone.
Beyond regulatory changes, this bill helps to address a strong trend in the small business space: the fact that the new generation of employees doesn’t want a one-size-fits-all offering of health insurance. Increasingly, employees want choice when it comes to health benefits. They want to be free to choose policies and packages that best suit their needs at a particular time. HRAs can help satisfy that desire. Plus, they are far less expensive (about 60% less) than employer-provided policies. I take this as a win for both employers and employees, and a potential sign that small businesses can expect more federal support for alternative benefit plans in the future.
Be sure to discuss all of your options with a qualified health insurance agent as you make your choices for next year. We’re here to help, too.
