In late 2016, President Obama signed the 21st Century Cures Act, which includes a provision that permit small employers to reimburse eligible employees tax-free for medical care. These QSEHRAs can be useful for small employers who wish to provide their employees additional benefits and help their employees obtain medical care, but do not necessarily want to incur the costs of offering employer sponsored health care coverage. Employers can offer QSEHRAs as of January 1, 2017.
How do QSEHRAs work?
If an employee incurs a medical care expense like health insurance premiums or eligible medical expenses under IRC Section 213(d) (i.e. dental treatment, eye exams), the employer can reimburse the employee for fees incurred up to $4,950 for single coverage or $10,000 for family coverage. Employees may not make any contributions to QSEHRAs. The maximum amount must be prorated if the employee has not been eligible for an entire year.
For a complete list of medical expenses covered under IRC 213(d) see https://www.irs.gov/pub/irs-pdf/p502.pdf. Employers may tailor what expenses are reimbursable to a certain extent and do not have to reimburse employees for all eligible medical expenses.
Much like other health care reimbursement arrangements, employees may have to provide substantiation before reimbursement. Even though reimbursement may be provided tax-free, any amounts reimbursed will have to be reported on the employee’s W-2 in Box 12 with the code FF.
Which employers can offer QSEHRAs?
To offer QSEHRAs, an employer (1) must not be an applicable large employers (ALE) under the ACA and (2) cannot offer group health plans to any of their employees. As such, an employer who offers group health coverage to some employees cannot offer a QSERHA to other employees.
ALEs are subject to the ACA’s employer mandate and employers cannot avoid penalties simply by offering QSEHRAs. This means that only employers with less than fifty (50) full-time equivalent employees can offer this benefit.
Which employees are eligible for QSEHRAs?
Typically, if an employer wants to offer a QSEHRA, it will have to offer it to all employees who have completed at least 90 days of work although there are certain groups that can be excluded.
Interaction between QSEHRAs and health exchanges
Eligible employees must disclose to exchanges the amount of QSEHRA benefits available to them. The exchanges will account for the amount of the available benefit, even if the employee does not utilize it, and will likely reduce the amount of the subsidies available to employees. Employers should consider this before adopting a QSEHRA.
Other administrative issues
In order to establish a QSEHRA, employers will have to set up and administer a plan. Group health plan requirements, such as ACA reporting, and COBRA requirements do not apply to QSEHRAs. Employers will likely have to establish reimbursement procedures.
Additionally, any eligible employees must be notified of the arrangements in writing at least 90 days before the first day they will be eligible to participate. For this current year, the IRS is giving employers who implement QSEHRAs in 2017 an extension until March 31, 2017 to provide a notice. The notice must provide:
- The amount of the maximum benefit;
- That eligible employees inform health insurance exchanges that this benefit is available to them; and
- That eligible employees may be subject to the individual ACA penalties if they do not have minimum essential coverage.
Next Steps
If small employers are interested in QSHERAs, they should ensure that they are not an ALE and that they are not offering health care coverage. If they are confident that they are able to establish QSHERAs, they should seek assistance from a third-party service provider who can establish the arrangement and perhaps assist in administering the reimbursements.
