In the final days of 2016, Congress enacted the 400-page 21st Century Cures Act, with massive bipartisan support. While the Act addresses several health-related issues, perhaps of most interest to church leaders is a provision relieving many small employers of one of the most feared provisions in the Affordable Care Act: the infamous $100 per day per employee penalty. Prior to the passage of the Act, the Internal Revenue Service could impose this penalty on any employer that continued to pay or reimburse employees' medical insurance under a private plan.
This article will review the background of the penalty, and explain who benefits from the new law.
The tax status of employer payments or reimbursements of employee medical insurance under private plans before the enactment of the 21st Century Cures Act is summarized below.
(1) Exclusion for employer-provided health benefits
Sections 105(h) and 106 of the tax code specify that an employee may exclude from taxable income amounts provided through an arrangement under which (1) an employer pays or reimburses premiums for health insurance for the employee and family members purchased in the individual insurance market (referred to as an employer payment plan or EPP) or (2) an employer reimburses the employee for medical expenses generally of the employee and family members (referred to as a health reimbursement arrangement or HRA).
Key point. The exclusions from taxable income of EPPs and HRAs have never been repealed by Congress. However, they are rarely used because of their treatment as group health plans under the ACA. And, since most fail to implement some of the mandatory market reforms that apply to group plans, they are subject to the $100 per day per employee excise tax penalty.