QSEHRAs Serve As Option For Small Employers Amidst Rising Premium Costs

Dec
11

As 2017 comes to a close, many small employers are struggling to find affordable group health plans on the insurance market. Given the substantial impact increased premiums have on individuals and small employers, many small employers have sought out alternative mechanisms for providing health insurance to their employees.  Qualified Small Employer Health Reimbursement Arrangements (“QSEHRAs”) might be their best option for providing tax-free reimbursements of medical expenses.

Under the Affordable Care Act’s (“ACA’s”) Market Reform rules, stand-alone Health Reimbursement Arrangements (“HRAs”) and employer payment plans used to reimburse employees for medical care expenses violate the ACA and are subject to Internal Revenue Code Section 4980D excise tax. The IRS quickly became aware of the negative impact this rule had on small employers and decided to create QSEHRAs, which became available to qualified small employers on January 1, 2017.  QSEHRAs, unlike HRAs, are not subject to health care reform requirements for group health plans.  At first, many areas of uncertainty surrounded the formation and implementation of QSEHRAs.  However, the IRS released Notice 2017-67 in mid-October, which contains detailed guidance on the requirements for providing a QSEHRA to employees.

A QSEHRA must meet the following four basic requirements: (1) the QSEHRA must be funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement; (2) after an eligible employee provides proof of coverage, the QSEHRA must provide for the payment or reimbursement of medical expenses incurred by the employee or the employee’s family members; (3) the amount of payments and reimbursements for any year cannot exceed the statutory limits ($4,950 for self-only coverage and $10,050 for family coverage in 2017; $5,050 for self-only coverage and $10,250 for family coverage in 2018); and (4) the QSEHRA must generally be provided on the same terms to all eligible employees of the employer.

In order to qualify for a QSEHRA as a small employer, a company cannot be an Applicable Large Employer under the ACA (i.e., must have less than 50 full-time equivalent employees in the prior calendar year) and cannot offer a group health plan to any of its employees. If an employer’s workforce increases to 50 or more full-time equivalent employees during a calendar year, that employer will become an Applicable Large Employer before the first day of the following calendar year.  Offering a group health plan to former employees or retirees will not disqualify the employer.  However, if an employer endorses a particular policy, form, or issuer of health insurance, it will constitute a group health plan and disqualify the employer.

Any eligible employee or family member can participate in the QSEHRA. Reimbursements for medical care are tax-free to the employee if the employee has minimum essential coverage (MEC) for the month in which the medical care is provided.  Medical care, as defined in Internal Revenue Code Section 213(d), includes health insurance premiums, but excludes out-of-pocket expenses already reimbursed from another source and premiums paid by the employee on a pre-tax basis, for coverage under a group health plan of another employer.  However, the QSEHRA can reimburse an employee for premiums paid after-tax under a group health plan provided by a spouse’s employer.  An initial submission of proof of MEC must be provided to the employer, in addition to proof of MEC with each new request for reimbursement for the same plan year.  An attestation by an employee will constitute proof of coverage if it states that the employee and family members have MEC, provides the date coverage began, and includes the name of the provider.

A QSEHRA must be provided on the same terms to all eligible employees on a “uniform and consistent basis,” but may exclude the following employees: (1) employees that have not completed 90 days of service; (2) employees that are under age 25; (3) part-time or seasonal employees; (4) employees covered by a collective bargaining agreement if health benefits were the subject of good faith bargaining; and (5) nonresident aliens with no earned income from the employer or sources within the U.S. Former employees, retirees, and non-employee owners must be excluded from the QSEHRA.  Furthermore, a 2% shareholder-employee of an S corporation does not constitute an employee for purposes of QSEHRAs.

IRS Notice 2017-67 provides many detailed rules on eligibility, nondiscrimination notice and reporting requirements, integration with other laws, and more. Complying with these rules is considerably important since failure to comply with the QSERHA requirements will result in a noncompliant group health plan and trigger ACA penalties.  If you are a small employer and are interested in setting up a QSEHRA, please contact one of our employee benefits attorneys for more information on the legal requirements and implementation process.

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