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Grow Your Business Your Team

Cures Act: What Tax-Advantaged HRAs Mean for Small Business

Cures Act: What Tax-Advantaged HRAs Mean for Small Business
Credit: Rawpixel.com/Shutterstock

The 21st Century Cures Act, a sprawling health care spending bill signed by President Barack Obama on Decemeber 13, includes in it a provision marking the return of what are known as the Health Reimbursement Arrangements (HRAs). These types of arrangements are essentially employer-funded health stipends that can be used by employees for qualified expenses, such as health insurance premiums or out-of-pocket expenses. HRAs were effectively ended by regulators in 2013, but are now a simple stroke of the president's pen from becoming available to entrepreneurs once again.

HRAs were invented in 2002, when the IRS created the fully tax-deductible mechanisms as a way for employers to offer a health benefit to their employees. They would be fixed amounts offered to each employee, either at the beginning of the year or monthly, for use in qualified health care expenses. They could stand alone or supplement a group health plan, and employees could carry over any unused funds at the end of the year. The money was also not included in an employee's W-2, meaning it was not considered taxable income. Even small employers who did not offer health insurance could afford these benefits, which helped attract and retain talent.

"HRAs were widely used, particularly in the small end of the market, by those small employers that didn't have the bandwidth for group health plans," Chris Byrd, executive vice president of WEX Health Operations, told Business News Daily. "It gave employers a way to help employees pay their insurance premiums; it gave them the flexibility to offer a health benefit." [See Related Story: How to Build a Great Employee Benefits Package]

  • Fixed amount employer contribution toward qualified employee (and family) health expenses, including health insurance premiums and out-of-pocket expenses.
  • Can be offered as stand-alone or supplementary to health insurance
  • 100-percent tax deductible for employer.
  • Not considered taxable income for employee.
  • Employees can carry over any unused funds from the year prior.

The IRS's 2013 shift barred small companies that did not offer group health plans from continuing HRAs by way of imposing a hefty financial penalty.

"These employer payment plans [HRAs] are considered to be group health plans subject to the market reforms," an IRS explanation of the regulation change reads. "Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100 per day excise tax per applicable employee."

The 21st Century Cures Act, which attracted heavy bipartisan support in both chambers on Capitol Hill, would roll back that penalty and allow small employers to once again offer HRAs independently of any larger insurance coverage.

That is particularly important as the percentage of small employers offering group health insurance has seen a net decline since its peak in 2010. That year, 68 percent of  all small companies offered group health plans, while 59 percent of companies with just three to nine employees did, according to a survey conducted by the Kaiser Family Foundation. By 2015, those numbers had decreased to 56 percent and 47 percent, respectively. 

"It really is cost and access causing that number to go down," Byrd said. "[The Cures Act] opens up an avenue for small employers that for the last three years has been closed. The vast majority of the small market didn't have an alternative, but this legislation allows that."

Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council, said HRAs hold the potential to provide cost-effective access to health benefits to both employees and employers and lauded Congress' decision to pass the measure.

"The inclusion of HRAs in the Cures Act is critically important for the health of employees who work at small businesses," Kerrigan said. "This flexible, affordable and valued benefit is especially needed given the shockingly high cost of coverage and the limited choices available to consumers and small businesses."

Nick Merkin, CEO of Los Angeles-based health care compliance company Compliagent, cited his company's own struggles contending with increasing health costs, and nodded to HRAs as a possible method of finding cost-savings without compromising the value of a benefits package.

"As the CEO of a small business myself, I can tell you that our group health care costs are a real budget item for us, and many of my [clients] tell me the same thing," Merkin said. "For employers, contributions to the [HRA] plan are 100 percent tax deductible and the expenses of establishing an HRA plan are typically a lot less than a low-deductible health care plan.

"For employees," he added, "the benefits they receive are also tax-free and, when you consider that employees are increasingly being asked to shoulder more of the costs of a group insurance plan every year, HRAs can be much less expensive for them as well, while providing comparable coverage."

Author's note: After passing the Senate with a vote of 94 to 5 with one abstention on Dec. 7, the 21st Century CURES Act was signed into law by President Barack Obama on Dec. 13.

Adam C. Uzialko

Adam received his Bachelor's degree in Political Science and Journalism & Media Studies at Rutgers University. He worked for a local newspaper and freelanced for several publications after graduating college. He can be reached by email, or follow him on Twitter.

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