Robert Loe CPA

QSEHRA: 2017 Small Business Health Option

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(Keep in mind, any information here is not meant to be used for anything other than general information purposes and especially not meant to be legal advice).

Back in December of 2016, a new piece of legislation was passed called the 21st Century Cures Act. For the most part, this benefited pharmaceutical companies by allowing them a little breathing room on regulations. However, at the very end of the Act, in Title XVIII section 18001, there is a provision that can benefit small businesses. This Title allows for an exception from group health plan requirements for qualified small employer health reimbursement arrangements (QSEHRA). These plans allow for pre-tax reimbursements to eligible employees to pay for health care costs up to a specified amount. The plan can also be structured to pay the costs of health care directly.

But what does that mean?

Essentially, when the Affordable Care Act came about, it made certain previously accepted health reimbursement arrangements (HRA’s) become non-compliant. These plans were considered to be fairly common at the time but made unlawful by the ACA. Traditionally, small businesses used this as a way to give their employees some sort of relief for health care costs but with the introduction of the ACA, these accounts were no longer valid and were subject to a $100 fine per day that they continued to be in service. This made them unusable by the entities that usually used them, small businesses.

With the introduction of the 21st CCA, the stand-alone HRA became feasible again but with some regulation and restrictions. The whole provision itself is just over seven pages long and details revisions to sections of the Internal Revenue Code (IRC) to allow for such language to added or removed that allows for a QSEHRA to be in compliance with the ACA. Right off the bat, let’s make it clear that this provision only allows for exceptions at the federal level. Each state has its own sets of health care mandates that still need to be complied to. The QSEHRA is not considered a group health plan and as such, is not subject to the same regulations as they are.

Who is eligible for a QSEHRA?

The requirements for such a plan is limited to business with 50 or less full-time employees (or equivalent FTE employees). Any more than that and you no longer stay in the small employer category and become a large one. An employer who offers a group health plan or is part of an ERISA controlled group, they are not allowed to sponsor a QSEHRA.

What is eligible for QSEHRA payments/Reimbursements?

This is up tot the discretion of the employer. They have to ability to limit the plan to cover only certain costs. However, most employers will use the same limitations as the original stand-alone HRA which is the same as the 21st CCA limits. According to the 21st CCA, a QSEHRA may reimburse/pay for an eligible medical expenses defined in Internal Revenue Code section 213(d). This includes but is not limited to, health care premiums, co-pay amounts, prescriptions, etc. For a full list, see the IRC section listed above. The employer should review receipts and other documents from the employee to verify that they are eligible for reimbursement.

What are the requirements?

  • Funded solely by the employer
  • Can only be used once employee shows proof of Minimum Essential Coverage (MEC)
  • Is provided on the same terms to all eligible employees (with a few exceptions)
  • Cannot exceed a total of $4,950 per employee (10,000 in the case of a family arrangement)
  • Notice Requirements

Funding

One of the main requirements of HRA’s in general is that they are funded solely by the employer. This means that there can be no salary or pay reduction contributions in this type of arrangement and because of that, the funds technically belong to the employer who can set restrictions on the account, to a certain extent, in any way they wish so long as they adhere to the basic requirements.

MEC

A QSEHRA itself is not considered minimum essential coverage, and the plan is only eligible for pre-tax reimbursements or payments if the employee has MEC throughout the duration of their enrollment in the plan. Should the employee fail to retain MEC, the payments and reimbursements become taxable income and therefore subject to withholding and federal taxes. The plan can be used to pay premiums for the MEC provided that the employee first acquires the MEC plan and then become reimbursed (the employee is required by law to notify the Marketplace of their HRA amount which may reduce any premium tax credits previously provided). Proof of MEC must be acquired before any payments/reimbursements can be made.

Equality

The plan must be provided on the same terms to all eligible employees. The term eligible employee is any employee of the employer except for certain exclusions. Therefore, the reimbursements must be the same between all levels of employees. However, a larger benefit can be made on the basis of an employee’s age, the number of covered family members and/or price of an insurance policy in the relevant individual health insurance market. Generally, all employees must be offered enrollment in the plan unless they meet the following exclusions: Less than 90 days of service with the company, Under age 25, Part-time or seasonal employee, Union employees, or Non-resident aliens. The employer has the discretion to choose any of those exclusions in the determination of eligible employees.

Maximum Amount

For a single employee, the amount of health care payments or reimbursements cannot exceed $4,950 per year (amount adjusted each year for inflation). Any amounts over that will no longer be treated as pre-tax and will be added to the employee’s gross wages. The same applies to employees who are eligible for a family limit but replaces the $4,950 with a 1$10,000 limit. These maximum amounts are limited based on the length of employment. If the employee did not work for a full year, the amount is pro-rated for partial year coverage.

Notice Requirement

In order for an employee to provide a QSEHRA without being subject to any penalty, they must provide a notice to their employees within 90 days before the date of eligibility of the employee. Failure to do so will result in a fine of $50 per employee up to $2,500 per year. A transitional relief has been granted for 2017 due to the late passage of the law. Employers have up to March 13, 2017 to provide such notice for a 2017 plan (90 days after the date of enactment). The notice to employees must include the following information:

  • A statement of the mount which would be eligible employee’s permitted benefit under the arrangement for the year
  • A statement that the eligible employee should provide the information described in the above line to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit
  • A statement that if the employee is not covered under minimum essential coverage for any month the employee may be subject to tax under section 5000A for such month and reimbursements under the arrangement may be includible in gross income

Employer Responsibility

As the employer providing the QSEHRA, there are certain responsibilities that are taken on.

  • W-2 reporting
  • COBRA
  • HIPAA
  • ERISA

W-2

At the end of the year, the employer must report the amount of reimbursement/payment on the employee’s W-2 as the aggregate cost of employer-sponsored coverage (box 12 code DD).

COBRA

The 21st CCA provides that a QSEHRA is an exception to COBRA requirements (Section 607(a) of 20 U.S.C 1167(1))

HIPAA

A QSEHRA is subject to HIPAA privacy and security rules, although, if it covers fewer than 50 employees and is self-administered by the employer, the employer may not be required to comply with the HIPAA rules with respect to its administration of the QSEHRA. This exception does not apply if the employer engages a third-party to administer the QSEHRA.

ERISA

This is where it gets a little fuzzy on the details for a QSEHRA. According to the Act, an amendment to the Employee Retirement Income Security Act of 1974 (ERISA) which excludes the QSEHRA from the definition of a group health plan. However, some professionals state that the QSEHRA is still a welfare benefit plan and subject to ERISA document requirements while others read the amendment and conclude that they are not. Since the Act is so new, there is not much interpretation on the matter. The Department of Labor employee that I had spoken to did not seem to understand what the plan was but stated that the DOL has yet to make an official statement on the matter due to the plan still being so new. In any case, it would be prudent to create a summary plan document (SPD) and a plan document that outlines the plan in detail for legal and administrative purposes.

Regardless, if your plan has under 100 participants (even though the limit is 50 FTE employees, an employer could include part-time or seasonal employees to participate) the employer does not subject to ERISA Form 5500 filing requirements.

While these plans can be self-administered, most businesses choose a third-party administrator (TPA) for their plan due to constant changing laws that could potentially make your plan out of compliance during the year. In any case, you should contact a professional to get more information on the new QSEHRA plans should you wish to proceed. Self-administration is not impossible, and it saves you from having to adhere to certain HIPAA rules, but takes dedication and vigilance in monitoring new legislation.

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