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January 30, 2017
The 21st Century Cures Act (“Act”), passed and signed into law in December, includes a provision creating what is called a “Qualified Small Employer Health Reimbursement Arrangement” (“QSEHRA”). A QSEHRA allows small employers who do not offer group health insurance to their employees to provide money to employees on a tax-free basis; the money can be used to pay for individual health insurance policies and to reimburse employees for certain medical expenses.
Prior to the creation of QSEHRAs, Internal Revenue Service (IRS) guidance prohibited employers from offering stand-alone HRAs. According to the IRS, stand-alone HRAs would not comply with various ACA group market reform requirements. IRS guidance also prohibited employers from using an HRA to reimburse employees for premiums for individual health insurance coverage. This prohibition applied even if the reimbursements were treated as taxable income to the employee. Now, however, eligible small employers will be able to use a QSEHRA to help pay for an employee’s individual health insurance on a tax-free basis up to certain limits (described below).
Employers and Employees Eligible for a QSEHRA?
To offer a QSEHRA, a small employer must not qualify as an Applicable Large Employer (ALE) under the IRS §4980H rules. Generally, this means the employer must have fewer than 50 full-time equivalents (FTE) the previous calendar year. To be eligible to offer a QSEHRA, a small employer also cannot offer any other group health plan to its employees.
An eligible employer must offer the QSEHRA to all employees except:
A QSEHRA must be funded solely by employer contributions. Employees may not make contributions to a QSEHRA and may not contribute to the QSEHRA on a pre-tax basis. Employers must offer the QSEHRA on the same terms to all of its employees. However, the employer is allowed to vary the reimbursements to employees based on rate variations in the price of an individual insurance policy due to age rating or family size.
Reimbursements under a QSEHRA
QSEHRAs are subject to a number of rules regarding reimbursements and the employee’s use of the tax-free reimbursements available through the plan.
Employer Compliance Obligations
An employer must provide employees with a notice no later than 90 days before the beginning of the year (or the date that the employee is first eligible to participate in the QSEHRA). The notice must include:
Other Employer Compliance Obligations
Although a QSEHRA is not considered an ERISA “group health plan,” it is still an employee benefit arrangement that is subject to ERISA. Consequently, the employer will need to meet various ERISA obligations, such as the creation of plan documents. Employers must collect substantiation (e.g., receipts) from employees’ medical expenses or insurance premiums prior to reimbursing the expenses and must report the amount available for reimbursement under the QSEHRA on the employee’s Form W-2. Finally, since the QSEHRA is not considered a “group health plan,” it is not subject to federal COBRA rules.
While it is impossible to tell how many small employers who do not offer health insurance to their employees will be interested in the new QSEHRA arrangement, this is the first time that federal rules specifically allow employer funds to be provided tax free to an employee for the purchase of individual health insurance. It is also expected that the IRS will issue formal guidance to address some of the compliance and administrative details not specifically addressed in the statute.
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.