QSEHRAs Must Satisfy Certain Requirements
As a reminder, a recent law allows certain small employers to offer new “qualified small employer health reimbursement arrangements” (QSEHRAs) to reimburse employees for qualified medical expenses, including individual health insurance premiums.
Under prior agency guidance, stand-alone HRAs (except for retiree-only HRAs and HRAs consisting solely of excepted benefits) and HRAs used to purchase coverage on the individual market were considered group health plans that did not comply with certain market reforms of the Affordable Care Act (ACA). As a result, these HRAs were subject to a $100 per day excise tax per applicable employee under the federal tax code.
The 21st Century Cures Act, which was signed into law in December 2016, exempts so-called QSEHRAs from the ACA’s market reforms.
To qualify as a QSEHRA, an arrangement generally must:
- Be funded solely by an eligible employer without salary reduction contributions;
- Provide, after an eligible employee provides proof of coverage, payment or reimbursement of qualified medical expenses (which generally includes individual health insurance premiums) incurred by the employee or his or her family members;
- Limit annual payments and reimbursements to $4,950 per employee or $10,000 per family (which are prorated where coverage is less than the entire year); and
- Be provided on the same terms to all eligible employees.
Under the law, the term ‘eligible employer’ means an employer that has fewer than 50 full-time equivalent employees and does not offer a group health plan to any of its employees. Therefore, large employers and employers who offer a group health plan must still comply with the prior agency guidance.
The law defines an ‘eligible employee’ as any employee of an eligible employer. Employers may, however, exclude employees from QSEHRA eligibility who:
- Have not completed 90 days of service;
- Have not attained age 25;
- Are part-time or seasonal;
- Are covered by certain collective bargaining agreements; or
- Are nonresident aliens that receive no earned income from sources within the U.S.
Employer Notice & Reporting Requirements
While the 21st Century Cures Act requires an employer funding a QSEHRA for any year to provide an initial written notice to each eligible employee that includes certain information about the QSEHRA, the IRS recently announced its intention to issue additional guidance concerning the contents of the notice. Until the issuance of such guidance, employers that provide QSEHRAs for years beginning in 2017 are not required to furnish an initial written notice to eligible employees, and no penalties will be imposed for failure to provide the notice.
Note that the law also requires an employee’s total permitted benefit for the year to be reported on his or her Form W-2.
Click here for more information on QSEHRAs from the U.S. Department of Labor.
Our Health Reimbursement Arrangements section offers additional information about HRAs.
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Please Note: The information and materials herein are provided for general information purposes only and are not intended to constitute legal or other advice or opinions on any specific matters and are not intended to replace the advice of a qualified attorney, plan provider or other professional advisor. This information has been taken from sources which we believe to be reliable, but there is no guarantee as to its accuracy. In accordance with IRS Circular 230, this communication is not intended or written to be used, and cannot be used as or considered a ‘covered opinion’ or other written tax advice and should not be relied upon for any purpose other than its intended purpose.
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