January 5, 2017
ACTION MAY BE REQUIRED
A new law signed by President Obama restores the ability of small employers to reimburse employees for their individual health insurance premiums beginning January 1, 2017. The 21st Century Cures Act exempts qualified small employer health reimbursement arrangements (QSEHRAs) from many of the Affordable Care Act’s (ACA) requirements. It also provides funding for medical research and additional provisions designed to improve compliance with mental health parity requirements.
Since late 2013, IRS Notice 2013-54 and subsequent guidance prohibited most employers from using HRAs to reimburse individual health insurance premiums for employees. Such HRAs were categorized as group health plans and violated many of the ACA’s market reform requirements. Failure to comply could result in a hefty self-reported excise tax of up to $36,500 per person per year.
This Compliance Alert addresses frequently asked questions about QSEHRAs and action items for employers interested in implementing a QSHERA in 2017.
FREQUENTLY ASKED QUESTIONS
Which employers are eligible?
Only small employers with fewer than 50 full-time equivalent employees are eligible to offer a QSEHRA. The counting rules are the same as those used to determine Applicable Large Employer (ALE) status under Code 4980H(c)(2). Keep in mind that the IRS controlled group rules apply when determining employer size. Small employers who are members of a larger group of commonly controlled organizations with 50 or more total full-time equivalent employees are not eligible to offer a QSEHRA.
Can a small employer offer a QSEHRA in addition to other group health plans?
No. A small employer must not offer another group health plan to any employee.
Must a small employer collect proof of other coverage before providing reimbursement through a QSEHRA?
Yes. Documenting proof of other coverage is recommended to ensure accurate tax withholding. Any reimbursements provided to employees who are not enrolled in minimum essential coverage will be considered taxable income.
Can a small employer reimburse different amounts for different employees?
Yes, within certain limits. Generally, a QSEHRA must be provided on the same terms for all eligible employees. Currently, premiums for Marketplace coverage vary based on age, geography, family size, and tobacco use which may lead to different costs of coverage for different employees. Small employers are permitted to vary the amount of the benefit based on the employee’s age and family size, which provides some flexibility for small employers.
The following categories of employees may also be excluded from eligibility:
- Employees under age 25;
- Employees employed fewer than 90 days;
- Employees who are part-time or seasonal;
- Employees who are subject to a collective bargaining agreement; or
- Employees who are non-resident aliens with no US-source income.
The regulations do not appear to provide the flexibility to limit eligibility based on other employment categories, such as hourly versus salary workers.
Is there a limit on the amount a small employer may reimburse?
Yes. Reimbursements from the QSEHRA may be used to pay for individual health insurance premiums and other qualified medical expenses. However, tax-free reimbursements are limited to $4,950 per year for employee-only coverage and $10,000 per year for all other tiers of coverage. These amounts will be indexed annually. If an employee is employed for a partial year, these amounts are prorated based on the employee’s period of employment.
Are small employers permitted to charge employees to have access to the QSEHRA?
No. QSEHRAs, like traditional HRAs, must be completely funded by employer money. Employee contributions are not permitted.
Will employees who receive reimbursement for purchasing their own insurance through the Marketplace be eligible to receive tax credits?
Generally, no. The law contains specific rules on the interaction between a QSEHRA and premium tax credit eligibility for coverage purchased through the Marketplace. Any amount an employer provides through a QSEHRA for the purchase of individual health insurance will offset the amount of the premium tax credit an employee may be eligible to receive. If the difference between the QSEHRA reimbursement and the premium under the second lowest cost silver plan available in the Marketplace is affordable based on the employee’s household income, then the employee and any dependents will not be eligible for a premium tax credit.
Are there any other requirements small employers should be aware of when it comes to QSEHRAs?
Yes. There are a number of additional compliance requirements small employers should take into account, including the following:
- Form W-2 Reporting: The small employer must report the funds available through a QSEHRA on an employee’s Form W-2 as the cost of coverage under an employer-sponsored group health plan.
- Cadillac Tax: Funds available through a QSEHRA is subject to the Cadillac Tax, a 40% excise tax on high-cost group health plans. The effective date of the Cadillac Tax has been delayed until 2020.
- Notice Requirement: Small employers offering a QSEHRA must provide employees with a written notice no later than 90 days before the beginning of the plan year and when an employee is first eligible. The notice must describe the amount of reimbursement available through the QSEHRA. It must also include three statements: (1) that the employee must disclose the existence of the QSEHRA when applying for or renewing Marketplace coverage; (2) the employee may be subject to a tax penalty if minimum essential coverage is not maintained; and (3) the QSEHRA reimbursements. Penalties may apply if the notice is not provided.
- COBRA and State Continuation: QSEHRAs are exempt from COBRA. However, the application of state continuation provisions, or state mini-COBRA laws, is not clear. Small employers subject to state continuation in one or more states are advised to consult legal counsel.
- ERISA and HIPAA: QSEHRAs are exempt from many of ERISA’s group health plan requirements, as well as HIPAA’s portability requirements, because QSEHRAs have been designated as excepted benefits. However, excepted benefits are only exempt from some requirements. ERISA’s requirements for employee welfare benefit plans, including plan document and Form 5500 filing requirements, may still apply. Additionally, QSEHRAs are likely still subject to HIPAA’s privacy and security requirements.
EMPLOYER CALL TO ACTION
This provision comes at a critical time for small employers, although it may be too late for some to change course for January 1, 2017. Efforts by the new President and Congress to repeal and replace the Affordable Care Act may impact these new rules as well. Often, the necessary details employers need to fully implement a new benefit are found in regulations. Implementing regulations for QSEHRAs have not been published, and it will take time before such regulations are released.
In the meantime, small employers may take the following actions to prepare:
- Have a strategic discussion with your Consultant. Can your company take advantage of these new rules? Is a QSEHRA the right fit for your organization? While a QSEHRA may be an attractive choice for companies seeking to minimize the administrative burden of managing benefits, administrative and compliance responsibilities remain.
- Design the QSEHRA. There are a number of decisions to be made when implementing a QSEHRA, as it will replace any other major medical group health plan the company currently offers. Determine the eligibility requirements for the QSEHRA within the parameters described above. Consider what type of expenses to reimburse through the QSEHRA, as it may be designed to reimburse only premiums or both premiums and other qualified medical expenses. Decide what amount to reimburse through the QSEHRA and if reimbursing premiums, whether that amount will vary based on age or family size. Remember, other variations in the amount of reimbursement available are generally prohibited.
- Evaluate Third Party Administrators. Like more traditional HRAs, small employers may wish to engage a TPA to handle the administration of the QSEHRA, including claims submissions, collecting documentation of other coverage, and paying reimbursements. Engaging a TPA may ease some of the administrative burden on small employers.
- Prepare the required notice and any other necessary plan documents. Work with your TPA to develop the required notice once decisions have been made. No model notice has been issued so one must be created. Some TPAs may provide this service, while others will not. Ensure that you have the required notice prepared before making the QSEHRA available to employees. Consult with legal counsel to amend an existing ERISA plan document and summary plan description or obtain new plan documents for the QSEHRA. Also consider any HIPAA privacy and security obligations pertaining to the administration of the QSEHRA as a self-insured group health plan.
- Consult your payroll vendor. QSEHRA reimbursements must be reported as the cost of coverage under an employer-sponsored group health plan on the Form W-2. Confirm your payroll vendor has the ability to capture and report this information.
- Communicate the QSEHRA to eligible employees. Develop a communication plan and introduce the QSEHRA to eligible employees. If a small employer replaces a traditional major medical plan with a QSEHRA, provide employees with the required notice and necessary plan documents. Be prepared to explain who is eligible for the QSEHRA, what expenses may be reimbursed, the amounts available for reimbursement, and the process for submitting a claim, including the documentation required to receive tax-free reimbursement.
HCW will assist clients interested in implementing a QSEHRA to evaluate options and ensure compliance obligations are met. Should you have any additional questions, please contact our office at (919) 403-1986.