United States: Back From The Dead – Cures Act Resurrects Premium Reimbursement Arrangements For Small Employers

Last week, President Obama signed the 21st Century Cures Act (the "Cures Act"), which contains numerous provisions touching on a wide range of public health matters. Among the provisions is the creation of a new health benefit program available to small employers – the qualified small employer health reimbursement arrangement ("QSEHRA"). The purpose of the QSEHRA is to allow small employers to reimburse their employees for premiums paid for insurance purchased on the individual market, a practice that was prohibited under the Affordable Care Act ("ACA").

Background

Before the ACA became law, many employers sponsored health reimbursement arrangements (HRAs) that paid or reimbursed employees for insurance premiums and other eligible health expenses. However, after the ACA was passed, the IRS and other relevant agencies determined that HRAs were "group health plans" subject to the ACA market reforms (see, Notice 2013-54, FAQ XXII, Notice 2015-17 and Notice 2015-87), such as first dollar coverage of preventive services and the prohibition of annual and lifetime limits. This guidance means that employers could not use HRAs to reimburse employees for premiums paid for individual market coverage because by their very design, stand-alone HRAs could not satisfy all of the ACA's market reforms. Except in very limited circumstances, the only way for an HRA to comply with the ACA market reforms is for the HRA to be integrated with an ACA-compliant group health plan (for more information on HRA integration, see our February 23, 2015 and December 21, 2015 blog posts).

The Cures Act and Qualified Small Employer Health Reimbursement Arrangements

The Cures Act allows small employers to set up HRAs in the form of QSEHRAs. In many ways, QSEHRAs are just like pre-ACA HRAs – employer payments through the QSEHRA are deductible and reimbursements from the QSEHRA are excludible from employees' income. However, there are some important differences. Below is summary of the key aspects of the new QSEHRAs.

  • QSEHRAs may be adopted effective for plan years beginning on or after January 1, 2017.
  • Only small employers may establish QSEHRAs. A "small employer" means the employer is not an applicable large employer or "ALE," as determined under ACA rules. Generally, an employer is an ALE if it averaged 50 or more full-time employees during each month in the prior calendar year. Importantly, ALE status is determined on a controlled group basis, so a small subsidiary with fewer than 50 full-time employees might be ineligible for QSEHRA if related companies cause the subsidiary to be an ALE.
  • The QSEHRA must be offered on the same terms to all eligible employees. Eligible employees are defined as all employees, subject to the following exclusions: employees who have been employed fewer than 90 days, employees under age 25, part-time and seasonal employees, union employees unless the relevant collective bargaining agreement provides for eligibility, and non-resident aliens with no US-source income. If a QSEHRA is limited to premium reimbursement, the QSEHRA will still be treated as being offered on the same terms despite variation in premiums based on age and family size.
  • QSEHRA amounts are capped at $4,950 (single) or $10,000 (family), subject to adjustment for inflation. Employees eligible for only part of a year are subject to a pro-rated cap. Employees cannot contribute to QSEHRAs through salary reduction or otherwise.
  • Eligible employees must provide employers with proof of coverage before receiving reimbursement. If an employee is not enrolled in minimum essential coverage, the employee could be subject to an individual mandate penalty and any QSEHRA reimbursement could be includible in taxable income.
  • Employers must provide employees with written notice no later than 90 days before the start of the plan year (or the start of eligibility for a new employee) describing the amount of reimbursement available under the QSEHRA and explaining that the employee must disclose the presence of the QSEHRA when applying for or renewing coverage purchased from the Marketplace. If an employer fails to provide the notice, the employer could face a penalty of $50 per employee per failure with a maximum penalty of $2,500.
  • The amount available under a QSEHRA will be coordinated with any available premium tax credit available on the Marketplace. For example, if an employee covered by a QSEHRA is eligible for a premium tax credit, the amount available through the QSEHRA will offset the amount of the premium tax credit. It is possible for a QSEHRA to disqualify an individual from any premium tax credit if the QSEHRA is considered affordable coverage. A QSEHRA will be considered affordable coverage if the excess of the Marketplace premium for the second lowest cost silver plan over the QSEHRA amount available does not exceed 9.5% (indexed for inflation) of household income.
  • The QSEHRA is considered "applicable employer-sponsored coverage" for purposes of the excise tax on high-cost employer-sponsored health coverage (the so-called "Cadillac Tax"). The effective date of the Cadillac Tax, however, was previously delayed until 2020. More information on the Cadillac Tax can be found here and here.
  • The amount available under the QSEHRA must be reported on Form W-2 as the cost of coverage under an employer-sponsored group health plan.

Practical Considerations

The new QSEHRAs may be a great option for small employers that have struggled to provide affordable health coverage options for their employees. However, unlike the pre-ACA HRAs, QSEHRAs are subject to many new requirements. In addition to consulting with legal counsel, small employers should consider the following when implementing QSEHRAs.

  • QSEHRAs are "excepted benefits" excluded from the definition of "group health plan" for many purposes of the Code, the Employee Retirement Income Security Act and the Public Health Safety Act ("PHSA"). This means that QSEHRAs are not considered minimum essential coverage under the ACA, is not subject to coverage continuation requirements under COBRA or the PHSA, and is not subject to HIPAA portability requirements. The HIPAA privacy requirements, however, likely apply to QSEHRAs.
  • Although the continuation coverage requirements under federal COBRA rules and the PHSA do not apply to QSEHRAs, many states have coverage continuation requirements separate from federal requirements. Thus, employers must consider whether state coverage continuation requirements still apply to the QSEHRA.
  • A QSEHRA is likely disqualifying coverage for purposes of determining health savings account (HSA) eligibility. Thus, if an employee purchases an HSA-compliant high-deductible health plan on the Marketplace, the QSEHRA could disqualify the HSA component.
  • In the context of corporate transactions, acquiring companies should conduct diligence to determine whether the target sponsors a QSEHRA. If the transaction will result in the target becoming an ALE upon closing (i.e., as a result of controlled-group attribution), there does not appear to be any transition relief that would allow continuation of the QSEHRA. Therefore, the QSEHRA should be terminated prior to closing the transaction. Failure to terminate the QSEHRA prior to closing would disqualify the QSEHRA, meaning that QSEHRA could be subject to an ACA excise tax of $100 per employee per day.

Back From The Dead – Cures Act Resurrects Premium Reimbursement Arrangements For Small Employers

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