The IRS has released guidance on the requirements for eligible small employers to offer qualified small employer health reimbursement arrangements (“QSEHRAs”) to eligible employees. In Notice 2017- 67, the IRS presents 79 FAQs that cover various issues related to QSEHRAs.
Background. Effective January 1, 2017, certain small employers became eligible to offer QSEHRAs to eligible employees. (See the 3/8/2017 Alert.) Under a QSEHRA, businesses with fewer than 50 full-time employees can reimburse their staff for individual insurance premiums and qualified out-of-pocket medical expenses.
In general, QSEHRAs must:
- be funded solely with employer contributions.
- be offered to all eligible employees on the same terms.
- limit annual employer contributions (for 2017, the limit is $4,950 per year for employee-only coverage and $10,000 for family coverage).
- provide reimbursement for health care expenses incurred by the employee (or the employee’s family member), which can include premiums for individual health insurance.
An employer is eligible to establish a QSEHRA if:
- it is not an Applicable Large Employer (“ALE”) 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.
Employees are eligible for the QSEHRA “after the employee provides proof of coverage for the payment of, or reimbursement of … expenses for medical care.”
However, employers may exclude the following employees from QSEHRA participation:
- Part-time and seasonal employees
- Employees who have not completed 90 days of service
- Employees younger than 25
- Union employees (if health care coverage was the subject of collective bargaining)
- Nonresident aliens with no U.S.- source income
Notice 2017-67. Highlights from the Notice include:
Employer Eligibility: Whether an employer is ineligible to offer a QSEHRA because it offers group health coverage is determined on a monthly basis, and all entities within an employer’s controlled or affiliated service group are treated as a single employer. Thus, if one member of a group offers group health coverage, the entire group is disqualified from offering QSEHRAs. Employers become ineligible on the date they become ALEs (even if this occurs during the QSEHRA plan year) but a run-out period is permitted for expenses incurred during the period of QSEHRA coverage.
Eligible Employee: The Notice confirms that former employees and non-employee owners are ineligible to participate in a QSEHRA, and the determination of whether an employee is part-time or seasonal (and thereby excludable from coverage) is determined using Internal Revenue Code Section 105(h) nondiscrimination rules.
Notice Requirements. The Notice establishes the deadline for QSEHRA sponsors to distribute the required, initial written notice to eligible employees. For QSEHRAs provided in 2017 or 2018, the applicable deadline is the later of February 19, 2018 or 90 days before the first day of the QSEHRA’s plan year.
Minimum Essential Coverage Requirement. Eligible employees must have Minimum Essential Coverage (“MEC) in order to receive tax-exempt benefits. A QSEHRA must obtain proof that the eligible employee and the individual who incurred the expense had MEC for the month in which the expense was incurred. Employees must submit proof of MEC annually and attest that they continue to have MEC each time they submit for reimbursement.
HSAs: While a QSEHRA sponsor may contribute to an employee’s HSA and allow the employee to make pre-tax HSA contributions, an employee’s HSA eligibility may be lost if the QSEHRA is not HSA-compatible.
Premium Tax Credits: The guidance covers the impact of QSEHRA enrollment on eligibility for ACA premium tax credits and how permitted benefits reduce those credits.
“Same Terms” Requirement. QSEHRAs generally must be provided on the same terms to all employees. However, an employer may have different maximum reimbursement amounts for individual and family coverage. Eligible employees are not allowed to opt out of the QSEHRA, nor may the employer provide different benefit options. Employees may not carry over unused amounts into the following year if those amounts exceed the statutory maximum.
Reporting Requirements. Employers must report the amount of payments and reimbursements that an eligible employee is entitled to receive from the QSEHRA for the calendar year on the employee’s Form W-2. While no Form 1095-B is required to be provided to employees in connection with QSEHRA participation, QSEHRAs are subject to PCORI fees.
Notice 2017-67 is available at: https://www.irs.gov/pub/irs-drop/n-17-67.pdf