Tuesday December 5th, 2017
On Oct. 31, the IRS released much-anticipated guidance detailing requirements for small employers looking to offer qualified health reimbursement arrangements (HRAs) to their employees.
Small employers have wanted to offer their employees HRAs for reimbursement of individual premiums since the Affordable Care Act became law. However, the Treasury Department had rejected the idea, on the premise that HRAs used to buy coverage on the individual market still would be considered an employer-sponsored plan. This was a problem for small employers (those with fewer than 50 full-time employees), because such plans would not satisfy ACA requirements.
The 21st Century Cures Act, signed by former President Barack Obama in December 2016, changed all that. This amendment to the ERISA (Employee Retirement Income Security Act) and PHSA (Public Health Service Act) allows employers with fewer than 50 employees that do not sponsor group health plans to offer their workers HRAs to purchase health coverage, and at the employer’s discretion, reimburse out-of-pocket health expenses. The new IRS guidance (Notice 2017-67) now provides the detail necessary to administer these plans properly.
HRAs are self-insured medical expense reimbursement plans that reimburse medical expenses up to a specified dollar limit.
Expenses submitted for reimbursement must be substantiated. Reimbursements under an HRA are excludible from gross income—provided the HRA follows IRS guidelines. Reimbursements may not be made on a retroactive basis. Only expenses incurred after the HRA is established and after the participant has become eligible for it can be reimbursed on a pretax basis.
For small employers specifically, the 21st Century Cures Act partially overturns previous guidance that prohibited small employers from offering their employees HRAs.
Qualified small employer HRAs (QSEHRAs) are no longer considered to be group health plans under the ACA. Accordingly, small employers that establish HRAs can reimburse employees and their dependents for premiums used to purchase health care coverage in the individual market.
Compliant QSEHRAs must be exclusively funded by employer contributions and can't receive any funding from employees via salary reductions. Additionally, QSEHRAs must be provided on the same terms to all eligible employees.
Employer payments and reimbursement limits are adjusted annually for inflation. For plan year 2018, maximum annual reimbursements can't exceed $5,050 for individual/self-only coverage and $10,250 for family coverage.
An eligible employee means any employee of an eligible employer, excluding employees who:
QSEHRAs cannot be offered to retirees, other former employees, or non-employee owners.
The law does not apply to large employers (i.e, those with 50 or more full-time employees) who, under the ACA, are subject to penalties if they don't offer employees minimum essential coverage under an eligible employer-sponsored plan.
Small employers are required to provide employees with a written notice to each eligible employee at least 90 days before the beginning of each plan year. For employees who are not eligible to participate at the beginning of the year, notice must be provided on the date the employee is first eligible to participate.
For example, an eligible employer that provides a QSEHRA during 2017 or 2018 must furnish the initial written notice to its eligible employees by the later of Feb. 19, 2018 or 90 days before the first day of the plan year of the QSEHRA.
The notice must include:
Electronic notification is permitted.