A New, Lower-Cost Health Benefit for Small Employers

The 21st Century Cures Act was signed into law by President Barack Obama December 13, 2016.

At the bill signing, most of the focus was on the fact that the legislation commits $6.3 billion over seven years to research and treatment for cancer, Alzheimer’s, mental health, substance abuse, and more. However, the bill also provides a new, lower-cost way for the smallest employers to offer a health benefit to employees.

According to an article written by Mercer’s Barbara McGeoch and Katharine Marshall, small employers (those with 50 or fewer full-time or full-time equivalent employees) can now sponsor special tax-favored health reimbursement arrangements—called qualified small employer health reimbursement arrangements (QSEHRAs)—to help employees pay for health care costs, including premiums for individual health policies, on a stand-alone basis without having to satisfy the market reforms of the Affordable Care Act (ACA).

The article authors explain that employers may want to sponsor QSEHRAs because the ACA’s ban on annual dollar limits for essential health benefits and mandated cost-free coverage of certain in-network preventive services presented design challenges for employers. To comply with these reforms, an HRA for active employees generally must be “integrated” with another ACA-compliant group health plan. Otherwise, the employer can be subject to a $100 per day excise tax for each affected participant.

Many small employers cannot afford to sponsor medical plans meeting the ACA’s group plan standards, the authors contend, and under the ACA, could no longer sponsor stand-alone HRAs to help employees pay for individual insurance policies. They can now sponsor a stand-alone HRA that meets QSEHRA standards without also having to offer a comprehensive medical plan, and active employees can use their QSEHRA dollars to pay the premiums of major medical insurance policies sold in the individual market—including on public insurance exchanges—an option not available with ordinary HRAs.

The determination of whether an employer qualifies to sponsor a QSEHRA must include the workforces of all controlled group members, so small subsidiaries within a large employer’s controlled group will exceed the 50-employee threshold, the article warns.

As with all HRAs, funds to reimburse qualifying QSEHRA costs must be paid by the employer; no employee contributions are allowed. For 2017, reimbursements are limited to $4,950 for employee-only coverage and $10,000 for family coverage. These amounts are prorated for employees who participate in the QSEHRA for a partial year. The maximum dollar amounts are subject to cost-of-living indexing. But the amounts will rise only in $50 dollar increments, so in some years no COLA adjustment will apply, according to the article.

The article penned by McGeoch and Marshall says all employees must be offered QSEHRA coverage except for a few excludable categories. The coverage generally must be uniform, although each employee's "permitted benefit amount" can vary as long as these amounts are tied to a designated benchmark insurance policy. Failure to satisfy these requirements presumably would make the arrangement an ordinary HRA (rather than a QSEHRA), exposing the sponsoring employer to ACA noncompliance penalties, including the $100 per day, per participant excise tax.

According to the article, employers may exclude the following categories of employees from coverage:

• Employees with less than 90 days of service;
• Employees who are younger than 25 years old;
• Part-time or seasonal employees;
• Nonparticipating union employees; and
• Nonresident aliens with no U.S. source income.

QSEHRAs can reimburse employees for medical care as defined under Internal Revenue Code Section 213(d), including individual major medical health insurance premiums and other IRS-recognized medical expenses. As the article authors understand, a QSEHRA's benefits can be limited to specific expenses—for example, individual policy premiums or, conversely, qualified medical expenses exclusive of individual premiums. “Small employers will want to decide if the benefit can be used only for costs associated with individual coverage or more broadly—for example, to assist with out-of-pocket expenses for employees on a spouse's group plan. Note that HRA coverage—and presumably QSEHRA coverage—may interfere with HSA eligibility. In any case, the QSEHRA cannot reimburse expenses already paid from another source or insurance premiums paid before tax for other group coverage,” the authors write.

Significant administrative obligations may apply to QSEHRAs, including annually furnishing to eligible employees advance notice of the benefit, obtaining proof of eligible expenses to issue benefit payments, Form W-2 reporting of QSEHRA benefits, and satisfying certain Employee Retirement Income Security Act (ERISA) requirements (unless the plan is exempt from ERISA—such as a government or church plan). The penalty for failing to provide the advance notice is $50 per employee, with an annual cap of $2,500.

The article explains that QSEHRAs are exempt from the requirements imposed by ERISA and the ACA on group health plans. “But it appears QSEHRAs are subject to other general requirements of ERISA—for example, preparing a written plan document and furnishing a summary plan description.,” the authors say.

Employees can receive QSEHRA benefit payments free of federal income tax if the employee is enrolled in minimum essential coverage for the month the medical care was provided. Otherwise, the employee may be taxed on the amount of the benefit payments he or she receives from the QSEHRA.