IRS Penalty Eliminated for Employer Reimbursements of Healthcare Costs

President Barack Obama has signed into law legislation that eliminates penalties on employers who reimburse employees for the cost of health insurance premiums. The bill, dubbed the 21st Century Cures Act (“Act”), addresses other areas of medical need as well.

The IRS began enforcing penalties on employers in 2015 if they reimbursed employees for individual health insurance policies. These fines could go as high as $100 per day for each employee, or up to $36,500 per year.

The elimination of this penalty is found under Section 18001 of the Act and allows for “Qualified Small Business Health Reimbursement Arrangements” (“HRA”). Business owners will be permitted to reimburse their employees for the cost of insurance premiums and medical visits without tax penalties from the Internal Revenue Service. This provision is effective for plan years beginning after December 31, 2016.

To qualify as a small employer HRA, a reimbursement arrangement must be made available to all eligible employees with the company. The maximum reimbursement that can be provided under the plan is $4,950 or $10,000 if the HRA is provided for family members of the employee. Employers are eligible for the small employer HRA if they don’t offer group health insurance and they have fewer than 50 full-time employees. Contributions must be reported on employee W-2 forms every year, and participants must be notified of the amount of benefit provided each year. It is also important to note that HRAs are not considered a group health plan, so they are not subject to COBRA requirements. Employees participating in an HRA are also not eligible for subsidies for health insurance purchased while they are covered by the arrangement.

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