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Qualified Small Employer Health Reimbursement Arrangement

The 21st Century Cures Act (“Act”), a health bill, was signed into law on December 13, 2016, with an effective date of January 1, 2017. One of the provisions of the Act (Title 18) created a new arrangement that small employers may use to help their employees pay for eligible medical expenses and health insurance premiums – “a qualified small employer health reimbursement arrangement” (“QSEHRA”). Previously, the Affordable Care Act (ACA) did not allow employers to offer health reimbursement arrangements for payment of individual insurance premiums. To be an eligible employer that may offer a QSEHRA, the employer must be a small employer (less than 50 full-time employees or equivalents) and may not offer a group health plan to any of its employees.

To establish a QSEHRA, the following requirements must be met:

  • The QSEHRA must be funded only by the eligible employer. Employees are not able to contribute to a QSEHRA through salary reduction or otherwise.
  • The QSEHRA must be offered to all employees, with certain exceptions. The employer may exclude the following categories of employees from QSEHRA eligibility:
    o Employees under age 25
    o Employees with less than 90 days of service
    o Part-time employees
    o Seasonal employees
    o Employees covered under a collective bargaining agreement that does not provide for coverage under the QSEHRA
    o Non-resident aliens with no income from sources within the U.S.
  • The same terms must be offered to all eligible employees. The amount of benefits may vary depending on the price of health insurance in the relevant individual market based on age and family size.
  • Proof of coverage or expense (including premiums for individual health coverage)
    must be provided by the employee before receiving reimbursement of eligible medical care expenses, as defined in Section 213(d) of the Internal Revenue Code.
  • The maximum annual benefit is $4,950 for single employee coverage and $10,000 for family coverage for 2017. This amount is subject to an annual adjustment for inflation. Employees who are covered by a QSEHRA for only part of a year are subject to a prorated cap.

Health Plan Requirement for Employees:
Employees must purchase a health plan that has minimum essential coverage (MEC), as stated by the ACA. If an individual purchases health coverage without MEC, then they may be subject to penalties under the individual mandate of the ACA and reimbursements from the QSEHRA may be included in their gross income.

Impact on Premium Tax Credits in the Marketplace Created by the ACA:
Employees who obtain health insurance through the marketplace must report the amount in the QSEHRA to the marketplace. The premium tax credit will be reduced by the amount in the QSEHRA benefit. If the QSEHRA is considered affordable coverage, it may disqualify the employee from any premium tax credit.

Notice Requirements:
Employers must provide an annual written notice to employees no later than 90 days before the beginning of the year or the start of a new employees’ eligibility. If an employer offered a QSEHRA in 2017, a transition provision in the Act allowed employers to provide a notice no later than March 13, 2017 (90 days after the date of enactment of the Act). If a Notice is not provided, the employer may be subject to a penalty of $50 per employee per failure with a maximum penalty of $2,500.

The Notice must include the following information:

  • The amount of the QSEHRA benefit
  • A statement informing employees to notify the marketplace of the amount of the QSEHRA benefit if they apply for advance payment of a premium tax credit subsidy
  • A statement of the consequences of not getting MEC, which may result in taxes and the inclusion of reimbursements in their gross income.

The IRS has suspended the deadline for compliance with the Notice requirements until further guidance is issued.

The employer must report the amount of the QSEHRA benefit on employees’ W-2 forms.

QSEHRAs are not subject to federal continuation coverage requirements. However, state coverage continuation requirements may apply to the QSEHRA.

As QSEHRAs are subject to many new requirements, employers should consult with legal counsel when considering establishing a QSEHRA.

Notice: This information is provided for informational purposes only. It is not intended as a substitute for legal, accounting, or other professional advice. If such services are required, the services of a competent professional should be sought. The information is general in nature and does not address any specific situation. Each circumstance should be evaluated on its own merit.