The 21st Century Cures Act, passed and signed into law in December, includes a provision creating what is called a "Qualified Small Employer Health Reimbursement Arrangement" (QSEHRA). A QSEHRA allows small (non-ALE) employers who do not offer group health insurance to their employees to provide money to employees on a tax-free basis. The money can be used to pay for individual health policies and to reimburse employees for certain medical expenses.
Prior to the creation of QSEHRA's, IRS guidance prohibited employers from offering stand-alone HRAs. According to the IRS, stand-alone HRAs would not comply with various ACA group market requirements. IRS guidance also prohibited employers from using HRA to reimburse employees for premiums paid for individual health insurance coverage. This prohibition applied even if the reimbursements were treated as taxable income to the employee. Now, however, eligible small employers will be able to use a QSEHRA to help pay for an employee's individual health insurance on a tax-free basis up to certain limits.
Employers and Employees Eligible for a QSEHRA?
To offer a QSEHRA, a small employer must not qualify as an Applicable Large Employer (ALE) under the IRS §4980H rules. Generally, this means the employer must average fewer than 50 full-time employees/full-time equivalents (FTE) the previous calendar year and cannot be part of an Aggregated ALE Group which collectively averaged 50 or more FT/FTEs. To be eligible to offer a QSEHRA, a small employer also cannot offer any other group health plans to its employees.
An eligible employer must offer the QSEHRA to all employees exept:
Reimbursements under a QSEHRA
QSEHRAs are subject to a number of rules regarding reimbursements and the employee's use of the tax-free reimbursements available through the plan.
Employer Compliance Obligations
An employer must provide employees with a notice no later than 90 days before the beginning of the year (or the date that the employee is first eligible to participate in the QSEHRA). The notice must include:
Other Employer Compliance Obligations
Although a QSEHRA is not considered an ERISA "group health plan", it is still an employee benefit arrangement that is subject to ERISA. Consequently, the employer will need to meet various ERISA obligations, such as the creation of plan documents. Employers must collect substantiation (e.g. receipts) from employees' medical expenses or insurance premiums prior to reimbursing the expenses and must report the amount available for reimbursement under the QSEHRA on the employee's W-2 form. Finally, since the QSEHRA is not considered a "group health plan", it is not subject to federal COBRA rules.
While it is impossible to tell how many small employers who do not offer health insurance to their employees with be interested in the new QSEHRA arrangement, this is the first time that federal rules specifically allow employer funds to be provided tax free to an employee for the purchase of individual health insurance. It is also expected the IRS will issue formal guidance to address some of the compliance and administrative details not specifically address in the statute.
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