President Obama recently signed the 21st Century Cures Act (the Cures Act) which contains numerous health-care related provisions. One such provision allows small employers, beginning on and after January 1, 2017, to establish stand-alone health reimbursement arrangements to reimburse their employees for premiums paid for individual health plans, including health plans purchased on the public health insurance exchanges. This practice was prohibited under the Affordable Care Act (the ACA).
The Cures Act creates a new type of health reimbursement account -- the “qualified small employer health reimbursement arrangement” (QSEHRA). QSEHRAs are not considered group health plans and are not required to be integrated with a group health plan to satisfy the ACA’s market reforms. To qualify as a QSEHRA, the arrangement must satisfy the following requirements:
- The QSEHRA must be offered by an employer that is not an “applicable large employer” as defined by the ACA. Generally, an employer will be an applicable large employer if it employs 50 or more full-time employees during each month in the preceding calendar year.
- The QSEHRA cannot be provided to employees if the employer offers a group health plan to any of its employees.
- The QSEHRA must be provided on the same terms to all eligible employees of the employer. “Eligible employees” is defined as all employees of the employer; however, it may exclude employees who have not completed 90 days of service, employees who have not attained age 25, part-time or seasonal employees, employees covered by a collective bargaining agreement and non-resident aliens with no US source income.
- It must be funded solely with employer contributions. Employees cannot contribute to the QSEHRA with salary reduction or after-tax contributions.
- QSEHRA reimbursements are limited to $4,950 for employee-only expenses or $10,000 if the arrangement provides for reimbursement of family expenses. These dollar amounts are subject to cost-of-living adjustments. Employees who are not covered by the arrangement for the entire year are subject to a pro-rated cap on reimbursements.
- Employees must provide employers with proof of coverage to be eligible to receive any reimbursements. Reimbursements are limited to qualified medical expenses.
- Employers must provide eligible employees with a written notice describing the QSEHRA not later than 90 days before the beginning of the year in which the arrangement will be offered (or the start of eligibility for a new employee). For 2017, the notice must be provided by March 13, 2017. Failure to provide the written notice could subject the employer to a penalty of $50 per employee, up to a maximum of $2,500.
- The QSEHRA is not considered minimum essential coverage for purposes of the ACA’s individual mandate. Unless the employee is enrolled in minimum essential coverage, the employee could be subject to the individual mandate tax and the amounts reimbursed under the QSEHRA may be included in taxable income. The written notice must contain this statement.
- The amount available under the QSEHRA will reduce the premium tax credit that may be available to the employee from the public health insurance exchanges. The written notice must inform the employee that s/he must disclose the QSEHRA to any health insurance exchange if the employee is applying for advance premium tax credits.
- The QSEHRA must be adopted for years beginning on and after January 1, 2017.
- The amount available under the QSEHRA must be reported on Form W-2.
QSEHRAs are not considered “group health plans” for many purposes under the Code, ERISA and the Public Health Safety Act. Thus, QSEHRAs are not subject to the COBRA continuation coverage requirements or the HIPAA portability requirements.
This new health reimbursement arrangement is welcome news for small employers who want to help their employees pay for health care coverage.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the author.