Small Employers Have New Option for Benefit Offerings: Qualified Small Employer Health Reimbursement Arrangements
In today’s market, small employers have increasingly difficultly offering competitive benefit structures given the elevated financial and administrative cost associated with maintaining comprehensive employer-sponsored group health plan coverage. And, pursuant to guidance issued under the Patient Protection and Affordable Care Act (“PPACA”), employers have been generally unable to pay for the cost of an employee’s health insurance on the individual market without incurring substantial compliance burdens and/or penalties. Certain small employers now have a welcomed new option available to help their employees pay for the cost of health insurance and other medical expenses: a qualified small employer health reimbursement arrangement (“QSEHRA”).
The 21st Century Cures Act amended section 9831 of the Internal Revenue Code (the “Code”) and provides that certain eligible small employers can establish a QSEHRA under which individual health insurance premiums and other Code section 213(d) qualified expenses can be reimbursed from. Unlike other forms of health reimbursement arrangements, a QSEHRA is not considered a “group health plan” for most purposes under the Code, ERISA, and the Public Health Service Act (“PHSA”). As such, a QSEHRA is exempt from numerous cumbersome legal requirements (including the PPACA’s PHSA mandates and COBRA). Thus, small employers that meet the requirements set forth in amended Code section 9831 and IRS guidance (Notice 2017-67) have a new opportunity to make their benefit offerings competitive.
IRS Notice 2017-67 (the “Notice”) provides comprehensive guidance related to compliance and administrative issues associated with QSEHRAs. The Notice is lengthy and comprehensive, and thus requires detailed review by any employer contemplating establishing a QSEHRA. However, a snapshot of highlights from the Notice for employers to keep in mind include:
- What Employers Can Sponsor a QSEHRA? In order to adopt a QSEHRA, the employer cannot (1) be deemed an applicable large employer (i.e., generally an employer with 50 or more full-time employees (including full-time equivalents) in the preceding calendar year) under the employer shared responsibility mandate; and (2) offer a group health plan as defined in Code section 5000(b) (e.g., medical, dental, vision, health FSA, etc.) to its employees.
- What Employees Must Be Provided Coverage? The QSEHRA must be provided on the same terms to all eligible employees. Uniformity is determined on the basis of the amount made available for reimbursement and not the amount actually reimbursed. The term “eligible employee” generally means any employee of the employer. However, the QSEHRA may be designed to exclude certain classes of employees including (1) employees who have not completed 90 days of service with the employers; (2) employees who have not attained age 25 before the beginning of the plan year; (3) certain part-time and seasonal employees; (4) certain non-participating employees covered by a collective bargaining agreement; and (5) nonresident aliens who do not receive earned income from the employer from sources within the United States. Employees cannot waive participation in the QSEHRA.
- What Expenses Can Be Reimbursed? Guidance indicates that a QSEHRA can reimburse employees for Code section 213(d) medical care expenses (including major medical insurance premiums) incurred by the employee or an eligible family member. However, prior to providing reimbursement, the employee must substantiate the incurred expense (using a methodology similar to that used to substantiate health FSA expenses). Expenses reimbursed elsewhere do not qualify for reimbursement. Additionally, the QSEHRA may only reimburse expenses after the employee provides periodic proof that he or she maintains minimum essential coverage.
- What is the Maximum Benefit That Can Be Provided? The maximum amount available to an employee under a QSEHRA is subject to an annual statutory dollar limit (adjusted annually for inflation). The limit for self-only coverage in 2018 is $5,050. The limit for family coverage is $10,250 for 2018.
- How Does the QSEHRA Need to be Funded? The QSEHRA must be funded solely by an eligible employer (no salary reduction contributions are permitted).
- What Notice and Reporting Obligations Are Associated with a QSEHRA? Written notice, which includes certain statutory language, to each eligible employee must be furnished by the employer at least 90 days before the beginning of each plan year (and on or prior to the first day the employee becomes eligible for an employee who is not eligible to participate at the beginning of the plan year). Additionally, the total amount of the employee’s permitted QSEHRA benefit must be reported on Form W-2. And, employers that sponsor a QSEHRA must file a Form 720 annually and pay PCORI fees under Code section 4376.
Small employers that are considering establishing a QSEHRA for their employees should carefully review IRS Notice 2017-67 and Code section 9831 to ensure appropriate legal compliance. The requirements contained in the guidance are numerous and comprehensive. Additionally, employers should keep in mind that QSEHRAs are still subject to the general welfare benefit plan requirements of ERISA and the HIPAA administrative simplification rules (unless an exception exists). Moreover, benefits under a QSEHRA are taken into account for purposes of the Cadillac Tax provisions under Code section 49801. Thus, employers are encouraged to consult with their legal counsel in conjunction with establishing and administering a QSEHRA. Proper administration is imperative and small errors can have large penalties.
Copies of the Notice and Code section 9831 can be found at the following:
Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2018 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.