United States: Some Small Employers May Now Offer Special Health Reimbursement Arrangements

The Affordable Care Act (ACA) prohibition on stand-alone health reimbursement arrangements has been lifted for certain small employers, which may now offer employees a "Qualified Small Employer Health Reimbursement Arrangement" (QSEHRA). The 21st Century Cures Act, signed by President Obama on December 13, 2016, allows a small employer to fund a QSEHRA that pays all or a portion of the premiums for an employee's individual health insurance policy coverage or reimburses an employee for other eligible medical expenses. The specific QSEHRA requirements are described below.

QSEHRAs are only for "small employers." These arrangements may not be sponsored by an Applicable Large Employer (as defined under the ACA) so only an employer that employed fewer than 50 full-time employees (including full-time equivalent employees) in the prior year may adopt a QSEHRA. Employer size is based on the controlled group (for example, an employer with 40 full-time employees that is a member of an ERISA controlled group with 30 other full-time employees may not sponsor a QSEHRA).

The employer cannot offer any other group health plan (such as medical, dental, vision and health flexible spending account plans).  If the employer is part of an ERISA controlled group, it may not adopt a QSEHRA if any other controlled group member sponsors a group health plan.

Only the employer may fund the QSEHRA – No employee contributions are allowed.

The employer must offer the QSEHRA to all eligible employees.
The plan may exclude from QSEHRA participation an employee

  • is under age 25;
  • has not completed 90 days of service;
  • is classified as part-time or seasonal;
  • is a union employee (unless the collective bargaining agreement requires QSEHRA coverage); or
  • is a non-resident alien with no U.S. source income.

QSEHRAs must be offered on the same terms to all eligible employees. The amount of a premium reimbursement under the QSEHRA may, however, vary based on: (1) the ages of the employee and family members covered by the insurance policy; and (2) the number of family members covered by the policy.

A QSEHRA may reimburse an eligible employee for eligible medical expenses (defined in Internal Revenue Code section 213(d)). This extends to the employee and the employee's eligible family members, including premiums for individual health insurance coverage, subject to the following:

  • The employee must provide proof of the medical expense before receiving the reimbursement.
  • In order to receive tax-free QSEHRA reimbursements, the employee must prove he or she has health insurance that provides "minimum essential coverage" as defined under the ACA (otherwise, reimbursements are taxable).
  • For 2017, the maximum annual reimbursement amount for a QSEHRA is $4,950 (for employee only coverage) and $10,000 (for family coverage). These limits are pro-rated if an employee is not covered by the QSEHRA for the entire year. The employer could design its QSEHRA with lower reimbursement amounts.

Other QSEHRA considerations include the following:

  • A QSEHRA may prevent the employee from being eligible for a "Health Savings Account" and may reduce or eliminate the premium subsidy or tax credit the employee might otherwise be eligible to receive on the Health Insurance Marketplace.
  • A QSEHRA is treated as an "excepted benefit" and not considered a "group health plan" for certain provisions under the Internal Revenue Code and ERISA (e.g., a QSEHRA is not subject to federal COBRA requirements and is not considered "minimum essential coverage" under the ACA).
  • A QSEHRA is an ERISA welfare benefit plan, so it must have a plan document and summary plan description and ERISA's fiduciary and other rules apply.
  • A QSEHRA is subject to HIPAA privacy and security rules, although, if it covers fewer than 50 employees and is self-administered by the employer, the employer may not be required to comply with the HIPAA rules with respect to its administration of the QSEHRA. This exception does not apply if the employer engages a third party to administer the QSEHRA.

Small employer requirements include the following:

  • ERISA Form 5500 filing requirements should not apply if the QSEHRA is not funded because the plan will normally have less than 100 participants. An employer could, however, exceed 100 participants by allowing parttime or seasonal employees to participate in the QSEHRA.
  • The employer must provide a notice to all eligible employees at least 90 days before the beginning of each year (or, if later, before an individual is first eligible to participate in the QSEHRA). Going forward, the notice should be provided no later than the hire date to each new employee who becomes eligible to participate in the QSEHRA. The penalty for failing to provide the notice is $50 per employee up to a maximum of $2,500 for the year.
  • The employer must report the QSEHRA amount available for reimbursement on each eligible employee's Form W-2 and must report any taxable reimbursements made under the QSEHRA.
  • The employer must review receipts and other documents from eligible employees to verify medical expenses are eligible for reimbursement under the QSEHRA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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