New Stand-Alone HRA Alternative for Small Employers
On December 13, 2016, President Obama signed the 21st Century Cures Act (Cures Act). Included in the Cures Act are provisions that allow small employers to establish health reimbursement arrangements (HRAs) for their employees without risking penalties under the Affordable Care Act (ACA). In addition, the Cures Act extends excise tax relief for premium reimbursement arrangements that had been offered by small employers. That relief had expired in mid-2015, and has now been extended for all plan years beginning on or before December 31, 2016.
The Cures Act creates a new type of HRA called a “qualified small employer health reimbursement arrangement” or “QSEHRA.” The QSEHRA is not considered a “group health plan” under the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 or the Public Health Service Act. Briefly, the rules relating to QSEHRAs are as follows:
- Only an employer that is not an “applicable large employer” under the ACA and that does not offer a group health plan can establish a QSEHRA. Benefits must be funded solely by the employer.
- Benefits must be offered to all employees, with certain exceptions. For example, the QSEHRA can exclude employees who have worked less than 90 days, are under age 25 or are part-time or seasonal employees.
- Annual benefits cannot exceed $4,950 per year for single coverage or $10,000 for family coverage, and generally must be provided on the same terms to all eligible employees. However, certain variations based on differences in the cost of coverage in the individual health insurance market are permitted, such as due to age or number of family members. Benefit limits must be prorated for employees who become eligible mid-year.
- The QSEHRA can only pay or reimburse medical expenses as defined in Code Section 213(d), which includes insurance premiums. Benefits are excluded from the employee’s income only if the employee provides proof that the employee and, if applicable, all covered family members have minimum essential coverage.
- Employers must provide an annual notice to each eligible employee at least 90 days before the beginning of the plan year or, if later, the employee’s initial eligibility date. For 2017, the notice must be provided by March 13, 2017. The notice must state the amount of the employee’s benefit, tell the employee to disclose the benefit amount to the health insurance exchange if the employee is claiming advance premium tax credits, and warn the employee that he or she may be subject to tax on the benefits if the employee and family members do not have minimum essential coverage.
Small employers that have struggled to help employees obtain health insurance coverage may want to consider establishing a QSEHRA. Further guidance on the implementation and administration of QSEHRAs will likely be developed in the coming weeks. For further information, please contact a member of Fredrikson & Byron’s Compensation Planning & Employee Benefits Group.