Congress Overrides Stiff IRS Penalties and Allows Small Businesses to Provide Stand-Alone HRA

Published 12/8/16

On December 7th, in one of the first post-election signals from Congress of future "pro-business" expected ACA changes, Congress overwhelmingly passed legislation allowing small businesses (generally under 50 employees) the ability to provide employees alternative tax-favored "Stand-Alone" health reimbursement accounts ("HRAs") to employees of up to $4950 per year ($10,000 for employees with eligible dependents) beginning January 1, 2017. President Obama is expected to sign the legislation. However given the bipartisan approval even if he were to veto it, such a veto would likely be overridden.

Under current IRS rules (Notices 2013-54 and 2015-17), small employers that do not want to provide employer-provided health insurance but do want to provide the employee with tax-favored medical reimbursements through an HRA face stiff penalties under excise taxes imposed through IRC Section 4980D.

The good news for small employers is that this alternative will be available beginning next year. The bad news is that an employer still has to wade through very complex rules to determine if it is under the 50 employee threshold. Click here for IRS guidance on determining if it is not eligible because it is over the 50 employee threshold and is considered an "applicable large employer".

All employers are anxiously awaiting expected forthcoming relief from certain portions of the ACA. The attorneys at Barrett McNagny will continue to monitor legislative activity and will provide updates should any changes occur. 

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