September 1, 2014 by Tony Novak
Health Reimbursement Arrangements (HRAs) were a straightforeward tax and benefits tool before 2014. Most large companies have used them since the mid 1990s to help cover the cost of employee routine or smaller dollar amounts of health care costs more efficiently than it can be accomplished through health insurance. Over the last decade I’ve written perhaps a dozen articles about variance nuances, tax tips pertaining specifically to small businesses that use HRAs. Small companies have fewer resources, of course, so additional issues are raised with regard to documentation, claims validation and employee privacy, During that time I’ve helped hundreds of firms set them up and, to my knowledge, they all worked as intended as a tax-saving tool without any adverse actions by IRS.
But all of that has changed this year. The federal government was concerned that employers would use this tax tool to avoid the intent of the Affordable Care Act by encouraging the use of individual insurance purchased through an exchange instead of group insurance purchased by the employer. The most significant of those new rules for small business HRAs were phased in this year. The jist of the tax law change is simple: don’t use individual health insurance to bypass the intent of ACA. Yet there is still quite a bit of public uncertainty and mis-infortmation abut HRAs and the IRS have stated at least twice tat they intend to make non-compliant HRAs a subject of stepped-up enforcement.
Yesterday I published a blog post here that was intended to address key HRA issues in the most simple and unambiguous terms possible. That led to some confused reader comments that caused me to ask how thing got this way. What is the underlying cause of confusion about HRAs this year. I cam up with four culprits:
1) Awkward Approach – Recent government publications about HRAs address the topic from a legal perspective, not the perspective of a business owner. That means that the government is discussing several different parts of employee benefit law and has not yet pulled it together into “what it means for a small business owner” approach. This is not unusual; all new tax law goes through a similar venting process. Yet the impact is that the logic in the official guidance is hard to follow.
2) Awkward language – Additionally, the language contained in government publications like Technical Release 2013-03 is awkward, even for people who are familiar with these types of benefits law issues.
3) Third party publications including Wikipedia are out-of-date. The contributing authors appear to have little reason to make corrections since their business model is based on the earlier tax rules.
4) A low bar when it comes to full disclosure. – Most of the publicly available information is written by product promotors so it is skewed toward one position. Even Aetna seems to use a marketing approach thhatt would lead an averagge rreader to the worong conclusions about the HRA. This is not illegal; it is simply how marketing and sales work.