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You think those Affordable Care Act penalties of $2,000 to $3,000 per employee for not providing them with health coverage are high? Well, the Internal Revenue Service has quietly posted an item on its website’s Q&A section that may shock you.

The highest fine available in the IRS’s arsenal is $36,500 per employee!

This would apply to employers that maintain health reimbursement arrangements (HRAs) that are not tied to a health insurance plan. These “non-integrated” HRAs should generally have been eliminated by Jan. 1, 2014, or amended to be integrated with group health coverage.

The IRS posted this news right before open enrollment for the 2014 policy year, forcing many employers to scramble to ensure they were in compliance. The law specifically states that employers that provide these non-integrated plans would be subject to a $100 per day excise tax per employee. If they keep that policy for a full year, that would be $36,500.

Scared yet? If you have an HRA and want to know if it is in compliance, read on.

An HRA is an IRS-sanctioned employer-funded, tax-advantaged employer health benefit plan that reimburses employees for out-of-pocket medical expenses and individual health insurance premiums.

Most HRAs reimburse all or a subset of eligible medical expenses as described under IRS Code Section 213(d), and can continue if those eligible for the HRA are also eligible for and enrolled in an employer-sponsored ACA-compliant group medical coverage. This is called an integrated HRA.

Employer-sponsored ACA-compliant group medical coverage may be provided by an employer that offers the integrated HRA, or employees may certify they have coverage under a spouse’s ACA-compliant group medical plan.

There are also some new rules concerning the integrated HRAs. First, participants must be able to permanently opt out of and waive future reimbursements from the HRA annually, and the plan should be designed so that remaining HRA amounts are forfeited upon termination of employment. This enables employees to obtain individual coverage on exchanges and be eligible for premium tax credits.

HRAs that reimburse just vision or dental expenses are also still legal. Under current regulations, limited-scope dental or vision benefits will be excepted from the ACA’s market reform provisions “if they are provided under a separate policy, certificate, or contract of insurance, or are otherwise not an integral part of a group health plan…”

The regulation further provides that benefits are not an integral part of a group health plan unless (i) participants have the right to elect not to receive coverage for the benefits, and (ii) if a participant elects to receive coverage for the benefits, the participant must pay an additional premium or contribution for that coverage.

As a result, because an HRA is not an insurance arrangement, in order for dental or vision benefits provided through an HRA to be excepted from ACA provisions, employees that elect to have dental or vision coverage provided by the HRA must be charged a premium or contribution.

This will cause some difficulties for employers. That’s because an HRA must be “paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a 125 cafeteria plan.”

 

IRS generosity

Fortunately, the IRS is being generous when it comes to the $100 a day excise tax.

IRS code provides that no excise tax will be imposed if the IRS is satisfied the person otherwise liable for the tax did not know about the failure and, exercising reasonable due diligence, would not have known about the failure.

Also, it won’t impose the tax if the failure:

  • Was due to reasonable cause and not willful neglect;
  • Is corrected within 30 days of the date a person knew of a failure, or exercising due diligence would have known of a failure; and
  • Is corrected before notice of examination.