The recently enacted 21st Century Cures Act (the “Act”) will allow small employers that do not offer any group health plan to their employees to resume offering “qualified small employer” Health Reimbursement Arrangements (“QSEHRAs”) to employees that can be used to pay individual health insurance premiums. The Act becomes effective January 1, 2017.
Background. The Affordable Care Act (“ACA”) prohibited employers from offering stand-alone HRAs because the arrangements did not comply with many of the ACA’s market reforms, including the requirement to provide first-dollar coverage of preventive services and the prohibition on lifetime and annual limits. Following the ACA’s enactment, the IRS released guidance (IRS Notice 2013-54) that reiterated this prohibition and imposed an excise tax of up to $36,500 for failures to comply with this rule.
New Law. The Act provides that QSEHRAs will not be considered group health plans for ACA compliance purposes, which means the arrangements will be exempt from the market reforms that had caused their prohibition. Accordingly, certain small employers may resume offering their employees QSEHRAs, and employees may use funds in such arrangements to purchase individual health insurance.
The following is a summary of certain requirements attendant to QSEHRAs:
General Requirements. To qualify as a QSEHRA, the Act requires that the arrangement must:
- be funded solely with employer contributions, which means employees cannot make salary reduction contributions under the arrangement.
- be offered to all eligible employees on the same terms. However, the employer can exclude employees with less than 90 days of service, certain part-time and seasonal employees, certain collectively bargained employees, and non-resident aliens.
- limit annual employer contributions to $4,950 per year for employee-only coverage and $10,000 for family coverage.
- provide payment or reimbursement for health care expenses incurred by the employee (or the employee’s family member), including premiums for individual health insurance.
Employer Eligibility Requirements. An employer is eligible to offer a QSEHRA if:
- it is not an Applicable Large Employer under the ACA (i.e., an employer that had 50 or more full-time employees or full-time equivalent employees during the preceding calendar year); and
- it does not offer group health coverage to any of its employees.
Minimum Essential Coverage Requirement. If an employee uses the QSEHRA funds to purchase health insurance that does not provide minimum essential coverage, the reimbursement amount will be included in the employee’s gross income for tax purposes.
Notice Requirements. Employers that offer QSEHRAs must furnish a written notice to all eligible employees at least 90 days in advance of the beginning of the new plan year. (For 2017 the due date is March 13, 2017, i.e., 90 days after the December 13, 2016 enactment date of the Act.) The notice must explain:
- the amount that will be the employee’s benefit under the arrangement for the plan year;
- that the employee should provide specified information to any Health Insurance Exchange to which the employee applies for an ACA premium tax credit; and
- That if the employee is not covered by minimum essential coverage during the entire plan year: (i) the employee may be subject to the ACA’s individual mandate penalty, and (ii) reimbursements under the QSEHRA may be included in income.
The Act is available at: https://www.congress.gov/114/bills/hr34/BILLS-114hr34enr.pdf