On December 13, 2016, President Barack Obama signed into law the 21st Century Cures Act. This new law reverses a prohibition on small-employer funding of individual health insurance premiums. Effective January 1, 2017, small employers with fewer than 50 full-time employees will be able to offer employees a standalone health reimbursement account (HRA) without being subject to an excise tax. Prior to January 1, 2017, the Affordable Care Act (ACA) prohibited such an arrangement because it did not meet the ACA’s market reforms, and employers were subject to a tax of $100 per day for each affected participant. Under the new law, a small employer that does not offer a group health plan to its employees may offer their employees a health reimbursement arrangement, though it must be considered qualified. A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) must meet the following conditions:
- The employer must be a small employer, not subject to the pay or play mandate (i.e. they must have fewer than 50 full-time employees and full-time employee equivalents) and the small employer must not offer a group health plan to its employees.
- This arrangement must be offered to all full-time employees on the same terms and conditions. The benefit can vary based on the cost of individual health insurance in the market due to age and number of enrolling family members. For example, an older employee could be provided with a greater benefit than a younger employee based on the age-based pricing under the ACA.
- The QSEHRA must be funded solely by the employer. No employee contributions are permitted.
- Reimbursements under the HRA is capped annually at $4,950 for an individual, but may be increased to $10,000 if the QSEHRA also provides benefits for the employee’s family members. The maximum annual benefit would be pro-rated for employees not covered by the QSEHRA for the entire year (such as a newly hired employee). Please note the employer is required to report the available benefit under the QSEHRA on each employee’s W-2 form beginning in calendar year 2017.
- The QSEHRA can reimburse any medical expenses as defined in Section 213(d) of the Internal Revenue Code including, but not limited to, the cost of individual health insurance. Reimbursement is tax free to the employee, provided the employee is enrolled in minimum essential health coverage.
There are a few exclusions to who would be eligible for the QSEHRA. To name a few, employees that have not yet met the employer’s waiting period (which, under the ACA, cannot be longer than 90 days), employees younger than age 25, part-time and seasonal employees, union employees and non-resident aliens.
Small employers must provide eligible employees with a written annual notice at least 90 days before the beginning of the year regarding the option of the QSEHRA. Due to the fact that the law was just passed in December, employers have until March 13, 2017 to provide the notice to their employees for the 2017 plan year. If the employer has a newly hired employee, the employer must provide notice to the new employee prior to the employee’s date of eligibility. This notice must include the annual amount of the benefit under the QSEHRA. The notice must also include a statement explaining to the employee that the amount of the benefit could affect their eligibility or amount of a premium tax credit if coverage is purchased through the Health Insurance Marketplace/Exchange. The employee must inform the marketplace of the amount of the permitted benefit under the QSEHRA. Lastly, the notice must include a statement that if the employee is not enrolled in minimum essential coverage, he or she may be subject to the individual mandate penalty and that the QSEHRA reimbursements will be taxable. Employers will be subject to a penalty of $50 per employee for failure to provide the notice, up to $2500 per year.
Please note, a QSEHRA is not considered a group health plan and therefore is not subject to COBRA continuation coverage. Therefore, upon termination of employment or occurrence of another qualifying event under COBRA, the employer is not required to provide a COBRA notice to the employee.
However, there are still many reasons for employers to offer a group health plan, especially with the confusion and network limitations of the individual marketplace. In the individual health insurance market, carrier options are much scarcer and the costs of individual plans are much higher, though an employer-funded QSEHRA will offset the employee’s out-of-pocket expense on premiums.
Employers that offer a group health insurance plan are more likely to attract and retain good employees. Contact Cornerstone today and let our experts assist with providing creative plan solutions that align with the business objectives of your small group clients.
For more information, contact Cornerstone today.