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Hidden Traps for Small Employer HRAs in 2014

Surprised-businessLike many small employers with under 50 full-time equivalent employees, I thought my company would be relatively unaffected by the Affordable Care Act. I was surprised to discover that my company Healthcare Reimbursement Arrangement is legal, but is now completely unworkable.

I have offered for several years to full-time employees a standalone HRA for which they get pre-tax reimbursements for out-of-pocket medical expenses and health insurance premiums, up to the annual predetermined dollar limit. HRAs generally fall under Code Section 105(b) and are considered employer self-insured accident or health plans. By design, HRA plans have dollar limits on annual and lifetime benefits provided to participants. However, to be a qualified group health plan in 2014, the plan must provide minimum essential health benefits without annual or lifetime dollar limits. My company’s HRA fails to meet this basic requirement. 

Group health plans that do not comply with annual or lifetime limit rules are potentially subject to a severe penalty under Section 4980D. The penalty is $100 per day per participant, but limited to a maximum of 10% of the amount paid by the plan during the year where the failure is due to reasonable cause and not willful neglect. For my company’s HRA plan, this annual penalty (before limitation) could be a staggering $146,000 (four employees X 365 days X $100 per day). 

Some small employers qualify for exceptions to the penalty. A small employer is one that employed an average of at least two but not more than 50 employees on business days in the preceding calendar year. However, the exception only applies if the health coverage is solely provided by an insurer and the failure is due to reliance on an insurer. My company plan is uninsured so we do not qualify for this exception.

The penalty can also be avoided if the employer can show that they did not know that the violation existed (after exercising due diligence) and it was corrected within 30 days of discovery of the failure. The IRS could waive all or part of the penalty if the failure is due to reasonable cause and not willful neglect to the extent that the payment of the tax is excessive relative to the failure involved. 

In addition, on top of the penalty, ACA set up a nonprofit Patient-Centered Outcomes Research Institute that is partially funded by an excise tax sponsors of self-insured plans must pay. This tax really bugs me, as many employers with standalone HRAs do not even know about it and it is so low, it is barely worth the compliance hassle. Moreover, PCORI’s goal of helping  people make informed healthcare decisions, while laudable, has absolutely nothing to do with making insurance more affordable for small employers or employees. It is an annual excise tax of $1 per covered life for plan years ending before Oct. 31, 2013, rising to $2 a head for plan years ending before Oct. 31, 2014. There is a minimum penalty ($135) for failure to file Form 720. While the excise tax is deductible, any late filing penalty is not.

I terminated my standalone HRA effective Jan. 1, 2014. My employees are the losers in this situation, as they now are taxed on the fixed dollar benefit I am able to provide for their health care costs.

This law affects businesses of all sizes and the AICPA will continue to provide information and resources to help members and their clients. An upcoming webcast, ACA Update: Navigating the Final Employer Shared Responsibility Regulations, to be held 1 to 2 p.m. ET on Feb. 27, features a speaker from the U.S. Treasury and a practitioner that will discuss these regulations and related transitional relief. The Health Care Reform Center provides a timeline for various provisions, news articles, tax tools and links to IRS guidance and regulations.

Janet Hagy, CPA, Shareholder, Hagy & Associates, P.C. Janet has been in public accounting for almost 40 years providing tax planning and compliance services, primarily for small to medium-sized businesses and high net worth individuals. Janet currently serves on the AICPA's IRS Practice and Procedure Committee and is a member of the Texas Society of CPAs. She received her B.B.A. in Accounting from the University of Texas at Austin.

Surprised owner image via Shutterstock

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