Article written by: David M. Hanson, CPA
What are HRA’s ?
The term “HRA” is actually an acronym for health reimbursement arrangement, aka health reimbursement account. These types of arrangements are sponsored by employers for their employees and are specifically authorized by the Internal Revenue Code (IRC), specifically IRC Sec. 105 and 106. These types of plans have been part of the tax landscape for many years and have been utilized by many types of businesses, including, but not limited to, small/closely held businesses and farming operations.
HRA’s are employer-funded plans that are used to reimburse employees for medical expenses (including health insurance premiums) that otherwise aren’t covered by an employee’s health insurance. The plans typically had a limit (for example, $5,000) for total expenses that would be covered under the arrangement. For example, medical expenses incurred by an employee that are charged against an insurance deductible (and hence, come out the employee’s pocket) would be covered by an HRA. Payments that come to an employee from an HRA are tax-free up to the amount established by the plan on an annual basis. For employers that offer such an arrangement and the employees that are eligible for it, the benefits are a definite win-win for everyone!
Where Did HRA’s go ?
Although it is debatable whether the result was intended or not, HRA’s for many employers ended up being a casualty of “Obamacare”. Generally effective January 1, 2014, the U.S. Department of Labor and the Department of the Treasury came out with interpretations of select portions of Obamacare that made HRA’s unaffordable for most employers to continue offering. Specifically, the troublesome interpretations were that HRA’s were to be considered group health plans. As such, to be legal under Obamacare, HRA’s could not put a dollar cap on the medical expense reimbursements the arrangements would allow or otherwise pay for. The result was that most employers, because of cost, terminated their HRA programs. Bad news for the employees who had previously been covered !
It is an understatement to say that the wholesale termination of HRA’s was an extremely unpopular result for employers and employees alike; so much so that individual persons, affected businesses, business groups, and tax professionals bombarded Congress with messages proclaiming “FOUL”!. Further, the parties lobbied hard for a special exemption or other form of relief such that the Obamacare rules would be changed to allow HRA’s to be made legal once again.
Giving credit where it is due, Congress listened to the chorus of complaints and took action. Specifically, in December of 2016, Congress passed the “21st Century Cures Act” which contains provisions in it restoring HRA’s for the benefit of many employers and employees. Hooray !
As is typical and you might expect, there are some limiting conditions and provisions contained within the new law that must be understood by affected taxpayers before they completely jump back into the pool and restore their HRA plans as they were before Obamacare came along. A complete discussion of the limiting conditions and provisions of the new law is beyond the scope of this article; however, a great many of the taxpayers who had HRA’s previously and abandoned them are likely to find out they will be able to take advantage of the new law’s provisions.
As is usually the case in the tax law, there are many variable and nuances to consider in each taxpayer’s situation. Consequently, seeking the advice of an experienced, qualified tax professional is highly recommended.
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