By Scott Wold, Hitesman & Wold, P.A. with interpretation by David Ritchie, Vice President of VEBA Sales, BPAS VEBA & HRA/HSA Services
As you’re likely already aware, the Affordable Care Act (“ACA”) imposed certain requirements on group health plans. Under the ACA, group health plans could no longer have annual or lifetime limits and had to provide preventive care coverage for their participants.
These requirements were problematic for many employer-sponsored health reimbursement arrangements (“HRAs”), including the HRAs used to reimburse employees for the cost of individual insurance policies. Because an HRA is a group health plan, it is subject to the ACA group health plan requirements. By design, an HRA has annual limits and does not reimburse all preventive care expenses for participants. Therefore, stand-alone HRAs, including those reimbursing individual insurance premiums, are not compliant with the ACA (see IRS Notice 2013-54 and IRS Notice 2015-17).
That’s the bad news. Here’s the good news.
21st Century Cures Act
On December 13, 2016, President Obama signed into law the 21st Century Cures Act (“Act”). The Act contains a special rule that allows certain small employers to sponsor a stand-alone HRA, referred to as “Qualified Small Employer Health Reimbursement Arrangements” (QSEHRA).
The QSEHRA may be used to reimburse employees (and their dependents) for 213(d) medical expenses, including individual health insurance premiums. This 21st Century Cures Act amends the ACA definition of “group health plan” to exclude QSEHRAs, thereby exempting this type of plan from the ACA requirements that prevent HRAs from reimbursing individual insurance premiums.
The following is a broad overview of the provisions of the Act related to QSEHRAs.
Employers Eligible to Sponsor QSEHRAs
1. Must be a “small” employer. Only small employers are allowed to sponsor QSEHRAs. Under this Act, a small employer is defined in accordance with §4980H(c)(2) under which a small employer must have less than fifty (50) full-time and full-time equivalent employees during the prior year, i.e., an employer that is not an applicable large employer (“ALE”).
2. Employer may not offer a group health plan. The second condition an employer must satisfy to be eligible to sponsor a QSEHRA is that the employer must not be offering another group health plan to any of its employees.
Requirements of QSEHRAs
If an employer is eligible to sponsor a QSEHRA, the QSEHRA must satisfy specific design requirements.
1. Tax consequence if individual does not have Minimum Essential Coverage (MEC). For reimbursements of eligible expenses to be excluded from the participant’s gross income in accordance with IRS Code §§105 and 106, the individual incurring the expense must be enrolled in MEC. It does not appear that participants are required to have MEC (i.e., the absence of MEC only causes a tax consequence), but there is language in the law that could be interpreted to require participants to have “other coverage” to participate. More guidance from the IRS on this issue would be helpful.
2. Must be for 213(d) medical expenses of the eligible employee or eligible employee’s family. Reimbursements or payments from the QSEHRA must be for eligible medical expenses under IRS Code § 213(d).
3. The QSHRA must be offered on the same terms to all eligible employees of the eligible employer. There is an exception to this requirement: the amount of benefits available under the QSEHRA may vary based on age and family size to account for variations in the prices of insurance policies in the relevant individual health insurance market.
4. The QSEHRA must be funded solely by an eligible employer. The QSEHRA must be funded solely by the employer, so it can’t be funded by salary reduction contributions. (i.e., an employee cannot have his or her salary reduced, and the amount of the reduction be contributed to the QSEHRA.).
5. Reimbursements cannot exceed annual cap. Reimbursements or payments from the QSEHRA cannot exceed an annual cap (adjusted for inflation) of $4,950 for individuals or $10,000 for families. In the event that an individual is not covered by the plan for the entire year, the annual cap is prorated to reflect the months the individual is covered.
6. Notice is required. If an eligible employer intends to sponsor a QSEHRA for plan years beginning after December 31, 2016, it must notify eligible individuals in writing at least 90 days prior to offering the QSEHRA. Because of the timing of the Act, transition relief for 2017 is available for plans that can’t meet a 90-day period prior to the start of the plan year. In these circumstances, employers may notify eligible employees within 90 days of the enactment of this Act.
The Bottom Line
The QSEHRA is best suited for small-group employers that don’t offer a health plan to their employees. The same HRA discrimination rules apply, so, in most cases, owners being eligible will still have to pass discrimination testing.
Working with an administrator to ensure you are compliant is key to the success of these plans. Like any new legislation, rules can change so you should discuss your situation with your health insurance professional or a third-party administrator to make sure your company qualifies to offer QSEHRAs.