Cures Act delivers cure for small employers
The problemIf employers tried to provide tax-favored assistance to their employees to obtain health care coverage, the IRS would interpret this as a violation of the ACA’s prohibition on annual benefit limits, and therefore, could subject the employer to a $100 a day per employee penalty.
The solutionThe recently signed 21st Century Cures Act permits small employers to offer reimbursement of medical expenses, including health insurance premiums through a “Qualified Small Employer Health Reimbursement Arrangement” (QSEHRA).
Who can offer a QSEHRA?To be eligible to offer a QSEHRA, an employer must not be an applicable large employer under the ACA – meaning they can only employ less than 50 full-time employees. In addition, the employer may not otherwise offer a group health plan to any of its employees.
The QSEHRA must be funded solely by employer contributions. No employee salary reduction contributions are permitted. The contributions are tax-deductible to the employer and tax-free to the employee.
The QSEHRA must also be offered to all “eligible employees” on the same terms. Eligible employees are all employees of the employer; however, the employer can exclude:
- Employees covered by a collective bargaining agreement
- Part-time or seasonal employees
- Employees less than 25 years of age
- Employees with less than 90 days of service
What does a QSEHRA reimburse?The QSEHRA may reimburse employees for expenses related to medical care as defined in Code Section 213 incurred by employee or family members of the employee. But more importantly, in addition to regular medical costs, the QSEHRA may reimburse an employee for premiums for health insurance. To be reimbursed for health insurance, the employee must provide proof of coverage.
The maximum amount that may be reimbursed is $4,950 for the employee and up to $10,000 if family members are covered. If the employee is covered for less than a full year, the maximum is reduced on a monthly basis. The maximum reimbursement amount is subject to cost of living adjustments. There is no minimum amount. An employer may design a QSEHRA that provides a lower level of contribution/reimbursement.
How do you notify your employees?Employers offering QSEHRAs must provide a written notice to all eligible employees at least 90 days before the beginning of the plan year. If an eligible employee comes into the QSEHRA during the year, the notice is to be provided the day the employee is eligible to enter.
The notice must include the following information:
- A statement of the maximum annual amount available to the employee
- A statement that if the employee is applying to a health insurance exchange he/she must inform the exchange of the maximum amount
- A statement that if the employee is not covered under a minimum essential coverage program he/she may be required to pay the individual mandate tax for failing to have coverage
- A statement that the amount the QSEHRA reimburses the employee for the non-minimum essential coverage may be taxable
When will QSEHRAs be available?QSEHRAs will be available starting in 2017. If an eligible employer wants to establish one for 2017, the mandatory notice for next year can be provided no later than March 13, 2017.
If you wish to utilize a QSEHRA, you should examine your company’s compensation policy. When employers were not permitted to provide tax-favored assistance to employees without risking a penalty, many simply dropped any employer-sponsored health program and increased taxable compensation. Now that small employers may be able to use QSEHRAs, they may wish to reexamine their approach.
For assistance regarding QSEHRAs, contact the Employee Benefits Group.