Background and Details of the Change:
Under the recently enacted 21st Century Cures Act, certain small employers may provide Health Reimbursement Arrangements (HRAs) to help employees defray the cost of health coverage. Prior guidance from the various federal agencies had effectively prohibited most HRAs since the enactment of the Patient Protection and Affordable Care Act (the “ACA” or “Obamacare”).
Before the ACA, HRA programs were relatively common. They allowed employers to provide a tax-free benefit that employees could use to pay for unreimbursed healthcare expenses, including insurance premiums. The ACA’s restrictions on health plan lifetime limits and on reimbursing premiums led the agencies that oversee HRAs to ban most of them (the exception was for HRAs integrated with a larger group health plan).
This 21st Century Cures Act changes how the federal government views HRAs, essentially taking them out of the scope of laws applicable to group health plans (e.g., COBRA does not apply).
The various requirements for employers to offer a Qualifying Small Employer HRA (QSEHRA) are:
- Qualifying Employers - QSEHRAs may be offered by certain smaller employers only. They are not available to:
- “Applicable Large Employers” (ALEs) – generally those with more than 50 employees that are subject to the ACA’s “play or pay” mandate to provide affordable employee coverage and provide corresponding annual reporting to the IRS
- Any size employers that offer a group health plan
- Eligible Employees - QSEHRA benefits generally must be offered on the same terms to all employees. There are limited exceptions for:
- employees with fewer than 90 days of service
- employees under age 25
- certain part-time and seasonal employees
- collectively bargained
- non-resident aliens
- No employee contributions - An HRA, including a QSEHRA, must be funded entirely by the employer; employee contributions are not permitted, whether pre-tax or post-tax.
- Taxability of Reimbursements. An employee may be taxed on reimbursements from a QSEHRA if he or she does not have minimum essential coverage. In other words, an employee cannot enjoy a tax benefit from the QSEHRA if the employee does not maintain minimum essential coverage. It is unclear how or if an employer is required to verify whether an employee has minimum essential coverage.
- Benefit Amount - Benefits cannot exceed an indexed annual limit and must be provided on “same terms.” The limits for 2017 plans are:
- $4,950 for individual coverage
- $10,000 for coverage of more than one individual
- Notice - Employers must provide eligible employees with an annual QSEHRA notice, but the Internal Revenue Service has suspended this requirement until after it provides guidance on the form and content of the notice.
- W-2 reporting - Employers must include the employee’s QSEHRA benefits in Box 12 of the Form W-2.
- Exceptions - A QSEHRA is not considered a group health plan for most purposes, but it appears that in some instances it will continue to act like one:
- A QSEHRA is probably subject to HIPAA’s privacy and security rules, since the data is sensitive and related to the individual’s health
- Most QSEHRAs probably qualify as non-permitted coverage for purposes of Health Savings Account (HSA) contributions. An individual may not contribute to an HSA while covered by another health plan’s non-permitted coverage.
General Impact to Employers:
Eligible small employers were able to start a QSEHRA program as of January 1, 2017, but given the enactment of the 21st Century Cures Act in late December 2016 many employers were likely deterred from taking such quick action.
For more information, please reference: