What Were the HRA Rules for Employers in 2015?

A Health Reimbursement Arrangement, or HRA, is a benefit plan funded entirely by an employer. These arrangements are designed to reimburse employees for out-of-pocket medical care expenses, with the reimbursements being excludable from the employee’s income. For many years, HRAs offered a flexible way for businesses to help workers cover healthcare costs.

The regulatory environment for these plans shifted significantly with the passage of the Affordable Care Act (ACA). The law introduced new requirements for health plans that directly conflicted with the structure of many existing HRAs. By 2015, employers sponsoring these arrangements needed to understand and adapt to a new set of rules that fundamentally changed how HRAs could be offered.

The ACA’s Impact on Health Reimbursement Arrangements

The core conflict between traditional HRAs and the Affordable Care Act centered on the law’s “market reforms,” which established new minimum standards for health plans. Two of these standards were problematic for standalone HRAs, which are not connected to a primary group health plan. The first was a prohibition on annual dollar limits for essential health benefits, and the second was a requirement that plans cover certain preventive services without any cost-sharing.

An HRA, by its design, has an annual dollar limit because the employer contributes a specific amount of money for reimbursements. This structure directly violates the ACA’s prohibition on annual limits. Similarly, a standalone HRA does not guarantee coverage for preventive services at no cost, as the funds could be exhausted on other medical expenses before any preventive care is sought.

The Internal Revenue Service (IRS) provided clarification in Notice 2013-54. This guidance stated that employer payment plans, including standalone HRAs that reimburse employees for their own individual health insurance policy premiums, are considered group health plans. As group health plans, they became subject to the ACA’s market reforms, and the notice concluded these arrangements could not be integrated with individual market policies to satisfy the new requirements.

This interpretation rendered most standalone HRAs non-compliant for any employer with two or more participating employees. The guidance made it clear that providing employees with funds to purchase their own insurance on the individual market was no longer a permissible strategy at the time.

Penalties for Non-Compliance

Employers who continued to offer a non-compliant Health Reimbursement Arrangement after the new rules took effect faced financial penalties. The enforcement mechanism was an excise tax detailed under the Internal Revenue Code, designed to compel adherence to the ACA’s market reforms.

The penalty was calculated at $100 per day for each affected individual. This meant an employer could be liable for $100 daily for every employee, and potentially their family members, covered by the non-compliant plan. This could amount to $36,500 per employee over a year.

The responsibility for this tax fell directly on the employer. However, the IRS provided transition relief from these penalties for small employers through mid-2015.

Permitted HRA Structures Under 2015 Rules

Despite the broad restrictions on standalone HRAs, several compliant options remained available to employers in 2015. These structures were designed to align with the ACA’s market reforms by ensuring the HRA was properly connected to a qualifying health plan.

The most common compliant arrangement was an “integrated” HRA. To be integrated, an HRA had to be linked to an employer’s primary, ACA-compliant group health plan, and it could only be offered to employees enrolled in that coverage. The integrated HRA could then be used to reimburse expenses like deductibles or co-pays under the primary plan.

Another exception was for HRAs offered exclusively to retired employees. The ACA market reforms apply to plans covering active employees, so an HRA limited only to retirees was not subject to the prohibitions on annual limits or the preventive care mandates.

An exception also existed for very small businesses. The market reform rules did not apply to group health plans with fewer than two current employee participants. An employer with only one employee could therefore continue to offer a standalone HRA to that individual.

Special Considerations for S-Corporation Owners

The HRA rules created a particularly confusing situation for S-corporations. It was a longstanding practice for these businesses to reimburse the health insurance premiums for shareholder-employees who owned more than 2% of the company. Under tax law, these reimbursed premiums were included in the shareholder’s income but were also deductible by the shareholder-employee.

Following Notice 2013-54, these reimbursement arrangements were considered employer payment plans. If an S-corporation reimbursed premiums for two or more shareholder-employees, it was sponsoring a non-compliant group health plan and was subject to the excise tax. This created an issue for many small, family-owned businesses that had followed this common practice.

In response, the IRS issued Notice 2015-17 in February 2015. This guidance provided transition relief for these S-corporation arrangements. The notice stated that for 2015, the IRS would not assert the excise tax against an S-corporation for reimbursing individual health policy premiums for its 2-percent shareholders, and that this relief would continue until further guidance was issued.

While these rules defined the landscape in 2015, the environment changed again in subsequent years. The introduction of the Qualified Small Employer HRA (QSEHRA) in 2017 and the Individual Coverage HRA (ICHRA) in 2020 created new, compliant pathways for employers to reimburse employees for individual health insurance premiums.