The 21st Century Cures Act (Cures Act), enacted on December 13, 2016, provides a new opportunity for small employers to help employees pay for health insurance: the “qualified small employer health reimbursement arrangement” (QSEHRA). Under QSEHRA, certain small employers can give their employees pre-tax dollars to pay for premiums and other medical expenses, so long as the QSEHRA meets certain standards.
Since the enactment of the Affordable Care Act (ACA), employers have generally been unable to give their employees cash for the purpose of purchasing non-employer health coverage (so-called “Employee Payment Plans” or “EPPs”). The reason being: because EPPs were being used to finance employees’ medical coverage, the EPPs constituted employer-provided “group health plans” and were therefore required to meet (but failed to meet) all of the ACA’s insurance reforms (including the requirement to provide dollar-one preventive care and the prohibition on lifetime and annual limits). This was the case whether or not the EPPs provided pre-tax or post-tax payments. Employers who failed to meet the insurance reform requirements could be penalized up to $100 per day for each affected individual. For a more detailed discussion of these rules, please see our earlier post.
In 2015, the IRS provided some limited relief for EPPs of employers who were not “Applicable Large Employers” (described below). These employers could offer EPPs to reimburse employees for individual health policy premiums or Medicare Part B or Part D premiums. But the relief extended only through June 30, 2015, and did not apply to EPPs that would purport to reimburse employees for coverage under a health insurance exchange or for other qualifying medical expenses.
- Note: the Cures Act extended this relief through the end of any plan years beginning on or before December 31, 2016.
The QSEHRA is a type of EPP which is entirely removed from the definition of “group health plan” and is therefore exempt from the ACA’s insurance reforms. But the QSEHRA is not without its own many requirements.
- The QSEHRA is only available to employers who are not “applicable large employers” or ALEs. The QSEHERA uses the same standard as required under the ACA’s employer mandate – that is, an ALE is an employer that averaged 50 or more full-time and full-time equivalent employees on business days during a preceding calendar year. ALE status is determined on a “controlled group” basis, meaning that certain companies will need to be aggregated in determining ALE status. A controlled group consists of all persons treated as a single employer under Internal Revenue Code Section 414(b), (c), (m) or (o).
- The arrangement must be 100% employer funded; no salary reductions may be used to fund it.
- The arrangement must provide, after the employee provides proof of coverage, for the payment to, or reimbursement of, an employee for expenses for medical care (as defined in Internal Revenue Code section 213(d)) incurred by the eligible employee or the eligible employee’s family members (as determined under the terms of the arrangement).
- Note: QSEHRA funds may be used for many qualifying medical expenses, not just premiums.
- The reimbursements cannot exceed $4950/year for single coverage or $10,000/year for family coverage, adjusted for inflation. The amount must be prorated to reflect any partial year coverage.
- Note: if the employer wants to give more than $4950/$10,000, it must do so as taxable, unrestricted cash. Otherwise, the excess amounts will be considered to be a “group health plan” that does not comply with the ACA’s insurance mandates.
- The arrangement generally must be offered on the same terms to all employees of the employer (certain variations in the benefit are allowed to reflect variations in the price of an insurance policy in the individual market due to the eligible employee’s or family members’ age(s) or the number of family members covered by the QSEHRA).
- The employer cannot offer a group health plan.
- Note: this requirement will be unappealing to employers who, for example, want to offer a more robust group health plan to some classes of employees.
- The employer must give written notice of the benefit to employees no later than 90 days prior to the start of the plan year. The written notice must include: (i) a statement of the amount that would be the eligible employee’s permitted benefit under the arrangement for the year; (ii) a statement that the eligible employee should provide the information described in clause (i) to any health insurance exchange to which the employee applies for advance payment of the premium tax credit; and (iii) a statement that if the eligible employee is not covered under minimum essential coverage for any month, the employee may be liable for an individual shared responsibility payment under Internal Revenue Code section 5000A for that month and reimbursements under the arrangement may be includible in gross income. The penalty for failing to timely provide the notice is $50 per incident capped at $2500 per calendar year.
- Note: As of the posting of this blog, the notice requirement had been suspended by the IRS until further guidance on the contents of the notice is issued. See IRS Notice 2017-20.
- If the employee is entitled to a tax credit from a health care exchange, the QSEHRA benefit will reduce the credit.
- While not a “group health plan” within the meaning of Section 733 of ERISA, a QSEHRA is not otherwise exempt from ERISA. Accordingly, the QSEHRA would need to have a compliant Summary Plan Description describing the benefits. In addition, while ERISA plans with fewer than 100 participants are currently exempt from filing an annual Form 5500, the DOL has proposed to require a 5500 filing by “group health plans” with fewer than 100 participants; it is unclear whether this proposal will come to fruition, and if so whether the DOL would expand the 5500 reporting requirement to include QSEHRAs.
The QSEHRA is available for plan years beginning after December 2016.
Small employers who may be eligible for the QSEHRA are encouraged to contact us to discuss the next steps.