On December 13, 2016 President Obama signed the 21st Century Cures Act which includes a provision allowing small businesses to offer a new type of health reimbursement arrangement for their employees’ health care expenses, including individual insurance premiums. The provision for Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), a new type of tax-free benefit, takes effect January 1, 2017. Further, the act retroactively relieves small employers from the threat of excise taxes under prior rules for plan years beginning before 2017.
The new law does not repeal the ACA’s general prohibition against employer payment of individual insurance premiums. Rather, it provides an exception for a new type of arrangement — a Qualified Small Employer HRA or QSEHRA — provided that specific conditions are met.
First, the employer must meet two conditions:
- Employs on average no more than 50 full-time and full-time-equivalent employees. In other words, the employer cannot be an applicable large employer as defined under the ACA; and
- Does not offer a group health plan to any of its employees.
Next, the QSEHRA must meet all of the following conditions:
- It is funded solely by the employer; employee contributions are not permitted;
- It is offered to all full-time employees, although the employer may choose to include seasonal or part-time employees and/or may exclude employees with less than 90 days of service;
- For tax-free QSEHRA benefits, the employee must have minimum essential coverage (e.g., medical insurance under an individual policy);
- It pays or reimburses healthcare expenses (e.g., § 213(d) expenses) and premiums for individual policies;
- It does not pay or reimburse contributions for any employer-sponsored group coverage;
- The same benefits and terms apply to all eligible employees, except the benefit amount may vary by:
- Single versus family coverage;
- Prorated amounts for partial-year coverage (e.g., new hires); and
- For premium reimbursements, variations consistent with the age- and family-size rating structure of a representative individual policy; and
- Benefits do not exceed $4,950 if single coverage (or $10,000 if family coverage) per 12-month plan year. Amounts are prorated if covered for less than 12 months. Limits will be indexed for inflation.
Group health plans are subject to numerous federal laws, including SPD and other notice requirements under ERISA, coverage continuation requirements under COBRA, and benefit mandates under the ACA. The new law specifies that QSEHRAs are not group health plans, so COBRA and other requirements will not apply.
All employers offering QSEHRAs will be required to provide a notice to each eligible employee that:
- Informs the employee of the QSEHRA benefit amount;
- Instructs the employee that he or she must give the QSEHRA information to the Exchange if applying for a subsidy for individual insurance; and
- Explains the tax consequences of failing to maintain minimum essential coverage.
QSEHRA notices should be provided at least 90 days before the start of the plan year.
Employers also will be required to report the QSEHRA coverage on Form W-2, Box 12. The reporting is informational only and has no tax consequences. Although small employers usually are exempt from this type of W-2 informational reporting, apparently it will be required for QSEHRAs starting with the 2017 tax year.
To learn more about QSEHRAs or for details about the relief from excise taxes for small employers before 2017, see the 21st Century Cures Act. The relevant provisions are found in Section 18001 beginning on page 306.
There is additional information in ACA FAQ 35 (page 4) on this.
Employers that are considering QSEHRAs are encouraged to work with legal counsel and tax advisors that offer expertise in this area. Starting in 2017, employer-funded QSEHRAs can offer valuable tax-free benefits to employees as long as they are designed and administered to meet all legal requirements.