Small employers with no group health plan should consider a new Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) to help pay for individual health insurance policies on a tax free basis.
The Affordable Care Act (ACA) changed a long standing practice where employers reimbursed employees for premiums on their individual health care insurance coverage under an Employer Payment Plan (EPP). While this reimbursement remains nontaxable under IRC 105 and 106, the stand alone EPP is considered a health care plan that violates the ACA’s prohibition on annual dollar limits and therefore is subject to a penalty of $100 per day for each instance. This penalty effectively eliminated the EPPs, thereby limiting the tax-favorable access to healthcare coverage by employees of small employers.
Prior to leaving office, President Obama signed the 21st Century Cures Act (the “Cures Act”) that established the QSEHRA – a new type of health reimbursement account that can serve as a replacement for EPPs for years after 2016 .
1. How does the new QSEHRA differ from an HRA or EPP?
Health Reimbursement Arrangements (HRAs) and EPPs are mechanisms under which an employer reimburses medical expenses (whether in the form of direct payments or reimbursements for premiums or other medical costs) incurred by employees up to a certain amount. A “stand-alone” HRA or EPP (one that is not integrated with an employer’s group health plan) is considered a group health plan that is subject to the group market reform provisions of the Affordable Care Act, including the prohibition on annual dollar limits and the requirement to provide certain preventive services without cost sharing. Stand-alone HRAs and EPPs fail to comply with these group market reform requirements because these arrangements, by their definition, reimburses or pays medical expenses on the employee’s behalf only up to a certain dollar amount each year and may be subject penalties of $100/day per affected employee.
Similar to HRAs and EPPs, QSEHRAs are employer-funded account-based arrangements that can reimburse employees for certain medical care expenses (including healthcare premiums) incurred by employees and their spouses and dependents. Unlike HRAs and EPPs, however, QSEHRAs are not considered “group health plans” that are subject to the group market reform provisions of the Affordable Care Act.
2. What employers may offer QSEHRAs?
Employers that are not “applicable large employers” under the Affordable Care Act. Generally, these are employers with fewer than 50 full-time employees (including full-time equivalent employees) that do not offer group health plans.
3. What are the benefits of offering a QSEHRA?
• Employer perspective: Since QSEHRAs are not considered group health plans, these “stand-alone HRAs” can be used to purchase individual market coverage and reimburse qualified medical expenses without being subject to penalties imposed under the Affordable Care Act.
• Employee perspective: Employer reimbursements for individual health insurance policy premiums (and other qualified medical expenses) under a QSEHRA are excluded from an employee’s income.
4. What are the requirements for offering a QSEHRA?
• The employer cannot offer group health insurance coverage to any employee.
• The QSEHRA must be provided on the same terms to all eligible employees.
• Employer contributions only (no employee contributions or salary reductions permitted).
• Satisfy employee notice requirements.
• Satisfy reporting requirements.
• An employee must maintain minimum essential coverage in order to exclude the reimbursements from income.
5. What employees may be excluded from offering a QSEHRA?
For purposes of determining whether the employer offers the QSEHRA to all “eligible employees,” the following employees may be excluded:
• Employees with less than 90 days of service
• Under age 25
• Part-time or seasonal employees
• Union employees
• Non-resident aliens
6. What are the QSEHRA limits?
The maximum reimbursement under a QSEHRA is $4,950 for employee-only coverage, and $10,000 for family coverage. The limits are prorated for a partial year of coverage and indexed for future years.
7. Can the amount of the reimbursements under the QSEHRA vary from employee-to-employee?
Generally, the employer must offer coverage on the same terms to all eligible employees. However, the arrangement will not fail to satisfy the “same terms” requirement if the reimbursement varies on account of the price of an insurance policy, which is based on the age of the employee or family members covered or the number of persons covered.
8. What information must be included in the QSEHRA notices issued to employees?
• Maximum amount of benefit for the year.
• Employee must inform the Marketplace to which employee applies for premium tax credit assistance of the maximum amount of benefit available to the employee under the QSEHRA (notably, an employee’s eligibility for premium tax credits may be eliminated or reduced as a result of benefits available under the QSEHRA).
• Reimbursements under the QSEHRA will be taxable if the employee does not maintain minimum essential coverage.
9. When must QSEHRA notices be issued to employees?
Provide the notice not later than 90 days before the beginning of the year. Further guidance is expected to clarify if “year” refers to the calendar year or the plan year. For 2017, the 90-day notice was due March 13, 2017 (90 days after the enactment of the Cures Act). In the case of a new employee, provide the notice not later than the date the employee is eligible to participate in the QSEHRA.
Failure to timely provide the notice to employees can result in a penalty equal to $50 per affected employee (up to $2,500 per year).
10. What are the reporting requirements?
Employers must report the maximum amount available to the employee for the year in box 12 of the employee’s W-2, using code “FF.”
11. Are employers required to provide a COBRA notice to terminated employees?
No. QSEHRAs are not considered group health plans for purposes of COBRA continuation coverage.