The 21st Century Cures Act allows small employers to reimburse employees on a pre-tax basis for medical care expenses (including premiums for individual health insurance policies). Under transition relief issued on February 27, 2017, small employers interested in implementing a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) for 2017 are not required to comply with strict notice deadlines. It’s not too late for small employers to implement a QSEHRA to reimburse employees for 2017 premiums and expenses.
Prior to the Cures Act, employers were unable to offer any health reimbursement arrangements (HRAs) that were not integrated with other Affordable Care Act (ACA) compliant coverage because, by their definition, HRAs include a set annual dollar limit that does not satisfy the requirements of the ACA.
The Cures Act carves out an exception for QSEHRAs. As a result, an HRA arrangement that meets certain criteria is permissible, effective January 1, 2017.
Who should offer a QSEHRA?
QSEHRAs will generally be attractive for small employers (see below for eligibility requirements) that have not traditionally offered health plans to their employees and who were unable to offer HRAs on a standalone basis because of the ACA. Eligible employers will likely use a QSEHRA as a reimbursement device for individual insurance premiums, as some did prior to the ACA, rather than reimbursing a broad range of medical expenses.
Which employers are eligible to offer a QSEHRA?
A QSEHRA may be offered only by an eligible employer, which is broadly an employer that:
Is not an “applicable large employer” under the ACA (i.e. has fewer than 50 full-time employees in the prior year, including full-time equivalents, on a controlled group basis); and
Does not offer a group health plan to any of its employees. Technically this covers vision and dental plans, but we hope the agencies will clarify that HIPAA excepted benefits are excluded.
Which employees are eligible to participate?
An employer must generally offer a QSEHRA on the same terms to its entire population of employees. There are limited exceptions. An employer may exclude employees who (1) have not completed 90 days of service with the employer; (2) are under age 25; (3) are designated as part-time or seasonal; (4) are covered by a collective bargaining agreement; or (5) are nonresident aliens without earned income from sources within the United States. A QSEHRA must be offered to all eligible employees, so it is not an appropriate option for an employer that wishes to offer a benefit to a select group of employees only.
In addition, the employee must have “minimum essential coverage” for the QSEHRA reimbursements to be non-taxable, and employees should be informed that QSEHRA reimbursements may reduce or eliminate any Exchange subsidies.
How is a QSEHRA funded?
A QSEHRA must be funded solely by employer contributions (i.e. employees may not fund the QSEHRA using salary deferrals).
What benefits may be offered?
A QSEHRA may be used to provide payment for, or reimburse the employee’s (and his or her family members’) documented medical expenses under IRC Section 213(d), such as co-pays, health insurance premiums, deductibles, dental and vision expenses or any combination thereof. The maximum benefit to each employee is $4,950 (for single employee coverage) or $10,000 (for family coverage) each year. This maximum amount must be pro-rated if the employee does not participate in the QSEHRA for the full year.
The Cures Act permits an employer to vary the amount of the benefit that is offered under the QSEHRA based on the employee’s age or the number of family members covered by the QSEHRA, and any variation in benefit level that is based on these factors must be tied to the premiums charged by the relevant individual health insurance market. How this will operate in practice remains unclear. We anticipate further IRS guidance regarding the ability to vary the amount of the benefit.
Are there any administrative requirements?
The employer must provide written notice regarding the availability of the QSEHRA at least 90 days before the beginning of the plan year and upon eligibility for new hires. However, for QSEHRAs that will begin in 2017, the IRS has waived the strict notice deadline until further guidance is issued. This means it is not too late to adopt a QSEHRA to reimburse premiums or expenses incurred in 2017!
Substantiation and Written Plan Documents
Although a QSEHRA is not treated as a group health plan and is explicitly exempt from ACA mandates and continuation coverage (COBRA) requirements, QSEHRAs remain subject to certain administrative and ERISA requirements, including substantiation requirements, W-2 reporting, and written plan documents (i.e. plan document and summary plan description).