November 17, 2017 

The IRS recently released almost 60 pages of guidance on Qualified Small Employer Health Reimbursement Arrangements (“QSEHRAs”) in the form of IRS Notice 2017-67. The guidance was wide-ranging covering topics such as who is an eligible employer, substantiation requirements, and the notice requirement. The Notice underscores the complexity associated with operating a QSEHRA and some traps for the unwary. In this article, we cover the highlights of the Notice.

What is a QSEHRA?

A QSEHRA is a special kind of health reimbursement arrangement (“HRA”) for small employers. “Small employers” for this purpose are employers who are not subject to the Affordable Care Act’s employer mandate/employer shared responsibility penalty (that is, those with less than 50 full-time and full-time equivalent employees in the preceding calendar year, or said another way, those that are not Applicable Large Employers (“ALEs”)). Additionally, to offer a QSERA, a small employer cannot offer other group health plan coverage to its employees (including a health FSA or a traditional HRA). A QSEHRA:

  • is funded exclusively by the employer (no employee contributions are allowed);
  • reimburses medical expenses (including premiums for individual market insurance coverage) for an employee and his/her family, but only after the employee has provided proof of minimum essential coverage (typically, major medical coverage);
  • has an annual limit of $4,950 (for 2017)/$5,050 (2018) for employee-only reimbursement and $10,050 (for 2017)/$10,250 (2018) if family members are included (which amounts are adjusted annually); and
  • is provided on the same terms to all eligible employees.

Normally, if an employer sponsors a stand-alone HRA that reimburses individual health insurance premiums, that HRA would be a non-compliant HRA because it violates various ACA rules. Employers sponsoring those non-compliant HRAs are subject to penalties of $100 per day per employee.

A QSEHRA is exempt from these penalties, because it is not subject to most ACA rules. However, the IRS Notice says that an HRA that does not meet all the above QSEHRA requirements (as more fully described in the Notice), the HRA will be deemed to be a non-compliant HRA. That would subject the HRA to those ACA rules and, consequently, the employer would be liable for the $100/day penalties. Therefore, compliance with the IRS rules for QSEHRAs is very important.

Notice Highlights

Below are some of the more important aspects of the IRS Notice, but employers that provide, or are considering providing, a QSEHRA should familiarize themselves with the contents of the IRS Notice:

Eligible Employers

  • Controlled group rules apply. If any member of a company’s controlled group offers a group health plan, no member of the controlled group can offer a QSEHRA. Similarly, a QSEHRA must be provided on the same terms to eligible employees across the entire controlled group. Businesses with common owners or parent-subsidiary relationships need to be careful of these rules.
  • An employer ceases to be eligible to provide a QSEHRA as of January 1 of the year it becomes an ALE. An employer is an ALE if it employed 50 or more full-time employees (including full-time equivalent employees) on average in the prior calendar year. This rule presents some administrative challenges. The calculations to determine if an employer is an ALE is not commonly finalized until after the calendar year is over, in early or mid-January. This means that an employer’s QSEHRA, could become a non-compliant HRA on January 1 and may continue for at least part of January while the employer figures out if it is an ALE. An employer providing a QSEHRA that is close to becoming an ALE should closely monitor its workforce throughout the calendar year, to ensure they terminate the QSEHRA on a timely basis, if necessary.
  • Employers can allow employees pay for individual coverage with after-tax payroll deductions. However, in a trap for the unwary, the Notice warns that employers should not endorse a particular policy, form, or issuer of health insurance. This endorsement appears to be taken from the ERISA safe harbor for voluntary benefits that we discussed here. Doing so causes the individual policies to be treated as a group health plan, which would, in turn, make the employer ineligible to offer the QSEHRA. At that point, the QSEHRA would become a non-compliant HRA, subjecting the employer to penalties.

Eligible Employees

  • Part-time and seasonal employees can be excluded, using definitions of “part-time” and “seasonal” that apply to self-funded plans currently. If an employee is in an excluded group, but then moves to an eligible group, he or she must be offered coverage the day immediately following the move to the eligible group.
  • If an employer chooses to let part-time and/or seasonal employees participate in the QSEHRA, they have to be offered it on the same terms as all other employees.
  • Employees may not waive coverage under the QSEHRA.

Maximum Reimbursement

  • The maximum reimbursement available under a QSEHRA may only vary based on the age of the covered individuals or the number of individuals covered under the individual health plan or plans (e.g., employee only versus family). Age and family size can be determined as of the first day of the QSEHRA’s plan year.
  • If an employee has self-only coverage and another family member has separate self-only coverage, the QSEHRA still has to provide the family reimbursement maximum to that employee.
  • On the other hand, if the employer employs an employee and his/her spouse, each person is entitled to the family maximum under the QSEHRA, even if both spouses are covered under a single insurance policy.
  • Carryovers of unused amounts are allowed. However, the carryover counts toward maximum available under the QSEHRA for any plan year. Therefore, if an employer is offering a QSEHRA that is already at the maximum level, it cannot offer carryovers.
  • The maximum reimbursement amount is prorated for newly eligible employees based on full and partial months that the employee is an eligible employee.

Qualifying Expenses and Reimbursements

  • A QSEHRA can reimburse for insurance premiums, other medical expenses, or a combination of the two. However, it has to reimburse the same expenses for all eligible employees.
  • If improper expenses are paid from the QSEHRA, or if expenses are paid without adequate substantiation, they must be repaid by March 15 of the year following the year the expense was reimbursed (or, if earlier, the date the employee’s tax return comes under IRS examination for improper reimbursements). If this is not done, all payments to all employees after the date of the improper reimbursement become taxable to the employees.
  • However, a QSEHRA may reimburse for over the counter drugs without a prescription. In that case, only that reimbursement will be taxable to that employee; it will not make other reimbursements to that employee, or other employees, taxable.
  • Cash-outs of unused amounts are not allowed.
  • If an employee receives reimbursement under a QSEHRA when the employee doesn’t have minimum essential coverage (“MEC”), those reimbursements are taxable to the employee. The IRS Notice lists different types of MEC in Appendix A to the Notice.
  • The employer must get proof that the employee, or any dependent whose expenses are being reimbursed, has MEC before an expense is reimbursed. The employee can provide a document from a third party showing coverage and an attestation that the coverage is MEC. Alternatively, the employee can attest that the employee and the individual have coverage that is MEC. An employer can rely on the attestation unless it has actual knowledge to the contrary.
  • Proof of MEC has to be provided for each year of the QSHERA.
  • Additionally, each time an employee requests reimbursement, the employee has to attest that the employee and the individual whose expense is being reimbursed have MEC. This means employers and their providers will need to have a mechanism in place to receive these attestations each year and each time an employee requests a reimbursement. If an employee fails to provide proof or the required attestation, the QSEHRA cannot reimburse the employee, even if the employer treats the reimbursement as taxable.
  • Sample attestations are available in Appendix B to the Notice.
  • All expenses must be substantiated based on the rules that apply to health FSAs. This generally requires receipts or other information from an independent third-party describing the service or product, the date of the service or sale, and the amount. The employee cannot self-substantiate or self-certify an expense. Employees can use explanations of benefits (EOBs) to demonstrate an expense, but they have to certify that the cost-sharing shown In the EOB (e.g., copays or co-insurance) has not been reimbursed from another health plan (including an FSA) and that the employee will not seek reimbursement from any other health plan.

Notice Requirement

  • A written notice must be sent to employees at least 90 days before the beginning of the QSEHRA’s plan year. If it is already less than 90-days before the start of the next QSEHRA plan year, employers have until February 19, 2018 to provide the notice.
  • The notice must include:
    • the maximum amount of reimbursement under the QSEHRA (either generally or the specific amount the employee can receive);
    • either the prorated maximum for newly eligible employees or a statement that the maximum will be prorated based on months of coverage and information to calculation the prorated amount;
    • a statement that the QSEHRA could affect an employee’s ability to get a premium tax credit to pay for individual market coverage through an ACA Marketplace/exchange and that the employee must notify the ACA Marketplace/exchange that the employee is eligible for the QSEHRA; and
    • a statement that if the employee does not have MEC for a month, the employee could be subject to an individual mandate penalty and any reimbursements the employee receives from the QSHERA would be taxable.
  • Notices can be provided electronically using IRS rules that apply to tax-qualified retirement plans. These are not the same as the Department of Labor safe harbor for ERISA plans, so employers will need to familiarize themselves with these rules, if they are not already.
  • For newly eligible employees, the notice must be provided before the first day the employee becomes eligible for the QSEHRA.

Reporting

  • The IRS Notice provides detailed rules on how to report the QSEHRA coverage on an employee’s Form W-2.
  • The Notice confirms that employers offering QSEHRAs do not have to report that coverage on IRS Form 1095-B.
  • However, an employer sponsoring a QSHERA does have to pay the Patient Centered Outcomes Research Institute fee that is generally due by July 31 of each year.

There are several other nuances and issues discussed in the IRS Notice. The Notice is effective for QSEHRA plan years beginning on or after November 20, 2017. The IRS is accepting comments on the Notice and plans to incorporate the Notice into proposed regulations. HUB International will continue to monitor the guidance as it develops.

Takeaways

Eligible small employers that are considering offering a QSEHRA should review these rules closely, as there are many small errors that could cause significant tax headaches for the employer and employees. As with any benefit plan, proper administration is key.

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.