Small employers now have the ability to assist employees with the cost of health care through a qualified small employer health reimbursement arrangement (QSEHRA). Prior to the Affordable Care Act (ACA), small employers were able to offer stand-alone health reimbursement arrangements (HRAs) to help employees pay for medical care expenses, including health insurance premiums, on a tax-free basis. This changed with the passage of the ACA, under which stand-alone HRAs were generally considered group health plans that violated the ACA’s annual dollar limit prohibition (some stand-alone HRAs, such as retiree-only HRAs, remained valid). Consequently, employers who continued to offer such arrangements could face fines of up to $36,500 per employee per year (with a $500,000 total limit). With the passage of the 21st Century Cures Act, which incorporates key components of the Small Business Healthcare Relief Act, small employers may again offer this benefit to employees.
Eligible Employers To be eligible to offer a QSEHRA, an employer (1) cannot be an “applicable large employer” under the ACA, i.e., had fewer than 50 full-time employees, including full-time equivalent employees, on average during the prior year, and (2) cannot offer a group health plan to any of its employees. Qualified employers must offer the QSEHRA on the same terms to all eligible employees, though benefit amounts may vary in accordance with the price of an insurance policy in the relevant individual health insurance market based on the age of the eligible employee and covered family members or on the number of family members covered.
Eligible Employees Employers are permitted to exclude the following categories of employees from participating in the QSEHRA: employees with fewer than ninety (90) days of service; employees under the age of twenty-five (25); part-time and seasonal employees; union employees if accident and health benefits were the subject of good faith bargaining between employee representatives and the employer; and employees who are non-resident aliens with no U.S. source income. To receive QSEHRA benefits, eligible employees must first provide proof of minimum essential coverage; because while eligible employees generally are not taxed on QSEHRA benefits, any QSEHRA benefits received in a month in which the employee does not have minimum essential coverage will be considered taxable and included in the employee’s gross income.
The Benefits The QSEHRA must be 100% funded by employer contributions, which means employee salary deferrals are not permitted. Reimbursements from a QSEHRA can only be used to pay for medical care expenses (as defined in Code Section 213(d)) of eligible employees and their covered family members. Further, annual benefits are limited to specified amounts – currently $4,950 for single employees and $10,000 for employees with dependents – and must be prorated if an employee does not work a full year.
The Paperwork Employers must provide an annual notice to eligible employees at least ninety (90) days prior to either the start of the year or the employee’s initial eligibility date. The notice must (1) state the amount of the employee’s permitted benefit; (2) instruct the employee to disclose the permitted benefit amount to the Exchange if the employee seeks advance payment of premium tax credits (QSEHRA benefits may impact the ability to receive a premium tax credit); and (3) notify the employee that he or she may be subject to an individual mandate penalty and may be taxed on any QSEHRA reimbursements received in a month in which the employee does not have minimum essential coverage.
Employers are also required to collect from employees substantiation (e.g., receipts) for medical expenses reimbursed from the QSEHRA.
Finally, employers must report the amount available for reimbursement under the QSEHRA on each employee’s Form W-2.