Opinion: Stop HRA-related IRS fines on small businesses
No good deed goes unpunished, especially if you are a small business trying to help employees afford healthcare and the IRS has you in its sight.
Although the Affordable Care Act (ACA) does not require businesses with fewer than 50 employees to provide health insurance to their workers, many small business owners want to do right by their employees and help them with the cost of insurance and medical care.
Historically, hundreds of thousands of small businesses have offered millions of employees Health Reimbursement Arrangements, or HRAs, to help with rising healthcare costs. In 2014, employer contributions to about 10 million HRAs averaged $1,390 for individuals and $2,781 for families, according to the Kaiser Family Foundation.
This little bit helps families better afford the high deductibles so common with Obamacare plans. We would all likely agree that these small business owners are doing the right thing, but the IRS says these HRA arrangements are wrong.
HRAs lead to IRS penalties
The ACA requires group health plans to meet certain rules and regulations, such as covering preventive benefits at no cost and imposing no limits on annual benefits. Because HRAs are reimbursement arrangements, they do not meet these rules. By definition, the $1,390 given to an employee is capped at $1,390 that year. And, because HRAs do not meet the set rules, and the IRS currently defines them as group health plans, employers can be fined $100 per day, per employee. That totals $36,500 per employee, up to $500,000 in total, every year.
This fine can accumulate pretty quickly. And for many small businesses, the fine is a financial unknown that is already starting to add up. For example, a small business owner who is currently offering an HRA to his six employees will owe the IRS more than $100,000 by the end of the year. Small employers, who want to do the right thing, simply cannot afford financial punishment of this magnitude, and will ultimately be forced to stop offering assistance through HRAs.
As a result of the IRS rule, employees at small firms will be forced to pay a lot more out of their own pocket for health insurance and qualified medical expenses.
Imagine you are the owner of a small construction company with six employees. You are completely overwhelmed by the process of choosing a health insurance plan for your employees. And you do not have a human resources department or a human resources specialist to help you choose a plan that best fits your company.
Ultimately, you decide your best option is to offer each of your employees $1,390 annually in an HRA to help with health insurance costs and qualified medical expenses. Your employees have come to rely on this money, and use it to help defray the cost of health insurance and qualifying medical expenses.
Due to the IRS ruling and the associated fines, you simply cannot afford to offer an HRA any longer. You are forced to tell your hard-working employees mid-year that you cannot offer this benefit.
Now, let's imagine that you are a manager at a small flower shop. Your employer typically contributes $1,390 in an HRA to help you with medical expenses. You choose to use the money to purchase a silver plan in the health insurance exchange, at a cost of $364 a month or $4,368 annually (as you do not qualify for a subsidy). But, because of the IRS ruling, your employer says he can no longer afford to offer an HRA. As a result, your out-of-pocket medical costs have essentially increased by a whopping 47 percent (i.e. you were paying $2,978 and you are now paying the full $4,368).
Ironically, small employers who are chipping in for the cost of health insurance and other medical costs through an HRA are subject to more exorbitant fines than employers who are bound by the employer mandate and are non-compliant. In fact, the HRA fine is 18 times more per employee ($36,500) than the employer mandate penalty for not providing any coverage at all ($2,000).