Qualified Small Employer HRAs (QSEHRA)
This update is only applicable to employers who averaged fewer than 50 full-time or full-time equivalent employees (based on a 30-hour work week) during the previous year and who do not offer a group health plan to employees. If this topic interests you, please note the time sensitive information highlighted below.
Some of you may remember that in 2014, the Treasury department in conjunction with the DOL and DHS, issued guidance targeting employer payment plans (EPPs) and health reimbursement arrangements (HRAs). An EPP is an arrangement under which an employer reimburses or directly pays for an employee’s individual health insurance premium. An HRA is an arrangement under which an employer reimburses an employee for medical care expenses.
The guidance provided that both types of plans were considered “group health plans” under the Affordable Care Act and thus subject to the market reforms thereunder. An EPP would be in violation of the market reforms if more than one employee was covered. An HRA had to be integrated with another group health plan of the employer (i.e. group health insurance) to be exempt from the market reforms. If these requirements were violated, the employer was subject to $100/day penalty for each employee participant. Yikes.
Subsequently, the IRS provided relief for EPPs of certain small employers, which has by now expired. S corporations were given a reprieve until additional guidance was issued.
Bottom line – most employers ceased reimbursing employees for health insurance premiums purchased from a 3rd party and stand-alone HRAs were terminated.
The 21st Century Cures Act signed into law on December 13th, 2016, provides a new option for qualifying small employers who don’t offer a group health plan to their employees. In addition, the law extends the relief previously provided to small employers to years beginning before 2017.
A QSEHRA is an arrangement which:
- Is available for plan years beginning after 12/31/16
- Pays or reimburses for medical care of eligible employees or covered family members
- Requires the employee to provide proof of health insurance coverage
- Limits payments or reimbursements for the year to $4,950 per employee or $10,000 per family (adjusted for inflation in future years)
- Is funded solely by the employer – i.e. no salary reduction contributions from employees
- Is provided on the same terms to all eligible employees
While all employees may be eligible, the arrangement can exclude employees if they have fewer than 90 days of service, are under age 25, or are part-time or seasonal workers, union members, or nonresident aliens with no earned income.
Two more requirements:
- The employer must give written notice to employees who are eligible to participate for the upcoming year at least 90 days before the beginning of such year. This notice requirement is treated as satisfied for 2017 if provided by March 13th, 2017.
- The employee’s permitted benefit must be reported on form W-2.
And again, QSEHRAs are only available to employers who did not average 50 or more full-time or full-time equivalent employees on business days during the preceding calendar year and who do not offer a group health plan to any of its employees.
While application of the QSEHRA may seem limited, it could be very valuable in the right circumstances. Consider a small corporation whose only employees are the owners and family members. A QSEHRA would allow a deduction for reimbursed medical expenses, whether premiums or out of pocket costs, on a tax-free basis up to the limit. Or, an employer who does not offer group health insurance coverage would now be able to reimburse individual premiums on a tax-free basis without application of the $100/day penalty.
While the law doesn’t require the plan to be in writing, it is probably prudent to have a written document setting forth who is eligible to participate, what the limits are, etc.
This newsletter includes a summary of the rules and requirements applicable to a QSEHRA and does not hit on all the details. If you’re interested, please let us know and we can provide more thorough information.
Zirkle, Long & Associates, LLC