Can HRAs reimburse subsidized exchange premiums after ObamaCare is fully implemented in 2014? Yes. According to current regulations, employers can use a Section 105 Health Reimbursement Arrangement (HRA) to reimburse employees for their qualified health insurance premiums, including individual or family subsidized exchange policies.
Background on Health Reimbursement Arrangements, Individual Health Insurance, and Health Reform
As employers plan their health benefits strategy for 2014 and beyond, many are looking at ways to incorporate the advantages, and cost savings, of individual health insurance, the health insurance exchanges, and the individual health insurance tax subsidies. One of these strategies growing in popularity is using a Health Reimbursement Arrangement to reimburse employees for their eligible health insurance and medical expenses. With this type of health benefits strategy, a Health Reimbursement Arrangement is offered instead of a traditional group health insurance plan.
Using HRAs to Reimburse Subsidized Exchange Plans
IRC Section 105 is the foundation of employer sponsored Health Reimbursement Arrangements, also referred to as HRAs or “medical reimbursement plans“. A Section 105 Health Reimbursement Arrangement plan allows businesses to reimburse an employee for medical and insurance expenses incurred by the employee or his or her dependents. A Section 105 Health Reimbursement Arrangement is different than a Section 125 "Cafeteria" plan.
Employees can use employer-funded Health Reimbursement Arrangements to reimburse the nonsubsidized premium of their individually purchased, exchange-based plan.
The Affordable Care Act (ACA) does not allow employees to use a Section 125 cafeteria plan to pre-tax an individually purchased, exchange-based plan.
ACA Guidelines for Section 105 and Health Insurance Exchange Plans
According to the Affordable Care Act (ACA) regulations:
(1) Government-subsidized portion of medical premiums (if applicable) is not tax deductible See PPACA Section 1401 adding Section 36(B)(g) to Subpart C of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986: "(g) Credit for Health Insurance Premiums- No deduction shall be allowed for the portion of the premiums paid by the taxpayer for coverage of 1 or more individuals under a qualified health plan which is equal to the amount of the credit determined for the taxable year under section 36B(a) with respect to such premiums")
(2) Unsubsidized portion of medical premiums are tax deductible. However, plans in AHBE exchanges are not qualified benefit under Section 125 See PPACA Section 1515 "OFFERING OF EXCHANGE-PARTICIPATING QUALIFIED HEALTH PLANS THROUGH CAFETERIA PLANS." This section specifies that exchange plans will not be a qualified benefit under Section 125.
(3) The Section 125 exclusion does not apply to:
1. HRA premium reimbursements for unsubsidized portion
2. HSA (e.g. when unemployed) premium reimbursements for unsubsidized portion
3. 1040 Schedule A deduction for premium expenses over 10% of income
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