Bill would bring back popular Obamacare workaround: Stand-alone HRAs

Remember that $36K penalty the IRS felt the need to remind everybody it would impose on employers that tried to give employees untaxed funds to purchase healthcare coverage? Well, there’s now hope that some employers won’t have to worry about this after all. 

That’s because legislators re-introduced the Small Business Healthcare Relief Act in both the House (H.R. 2911) and the Senate (S. 1697).

The timing of the legislation is significant because the penalty phase for stand-alone HRA usage kicked in on July 1, 2015.

If passed, the bill would provide an exception to Obamacare regs and allow some small businesses to use pre-tax dollars to help employees purchase healthcare benefits on the exchanges, as well as other out-of-pocket medical expenses. This is a tactic some employers were planning to take in lieu of providing their employees with health insurance under Obamacare’s employer mandate.

Put another way: The Small Business Health Relief Act would allow some firms to use stand-alone HRAs, plans that contribute un-taxed money to an employee to pay for insurance premiums.

Fewer than 50 workers

Specifically, the bill would:

• ensure small businesses and local municipalities with fewer than 50 employees are allowed to continue using pre-tax dollars to give employees a defined contribution for healthcare expenses
• allow workers to use HRA funds to purchase health coverage on the individual market and for qualified out-of-pocket medical expenses if the employee has qualified health coverage, and
• protect employers from being financially penalized for providing this cost-sharing option to employees.

The problem with stand-alone HRAs

Initially, stand-alone HRAs seemed like a logical Obamacare strategy for many small firms. But the IRS was quick to point out that stand-alone HRAs not only violated the healthcare reform law but that the agency could also slap firms with a $100 per day, per employee fine for setting up such a healthcare arrangement.

And that $100 per day penalty had the potential to grow to a $36,5000 annual per employee fine.

According to the feds, stand-alone HRAs are prohibited because stand-alone plans with set limits (the maximum amount of money the company promises to contribute) violate the Affordable Care Act’s ban on lifetime and annual limits.

To avoid penalties, employers do have some alternatives to stand-alone HRAs, such as:

• offering “integrated” HRAs, which are HRAs that are combined with an employer’s group health plan, and
• increasing employees’ taxable income to help them purchase insurance on their own, which many firms feel is cheaper than sponsoring a group health plan.

A version of this article was published previously on our sister website, HR Benefits Alert.