It may look like a word found in alphabet soup, but QSEHRAs—Qualified Small Employer Health Reimbursement Arrangements—are a useful new option for small business owners and employers. A brand-new law is making it easier and more cost-effective to reimburse employees for the cost of individual insurance plans on a pre-tax basis.
Offering a pre-tax stipend used to be commonplace, but the Affordable Care Act (ACA) made these arrangements unlawful. During the past few years, the only way employers have been able to provide a health stipend is to offer additional post-tax compensation to employees without tying that compensation to any insurance premium requirements. This is doable, but not ideal.
Now, that’s finally changing. On December 13, 2016, President Obama signed the 21st Century Cures Act, which goes into effect on January 1, 2017. This law allows small employers to set up a QSEHRA to contribute toward your employees’ healthcare costs.
In short, if you are a small employer (less than 50 employees and not subject to ACA coverage requirements) and you do not offer a group health plan to any of your employees, then you can offer a pre-tax contribution for insurance premiums and health expenses to all eligible employees. This is not a group health plan, it is not subject to ACA coverage requirements, and is not subject to income or employment taxes.
What do you need to do to get started with a QSEHRA plan?
In brief, to get a QSEHRA plan started you need to:
- Determine your contribution amount
- Prepare a notice for employees regarding coverage
- Provide the notice to all eligible members of your team, and then provide it with new hire paperwork on the first day of work to any new hire
- Require that participating employees provide you with proof of insurance coverage
Note that we highly recommend working with a qualified CPA or healthcare law professional to ensure that you are in full compliance with the law. This new law has very specific requirements, so it is important to get everything right. We’ve reviewed a few online providers, and we recommend Take Command Health. They are licensed health professionals who can help you get up and running with QSEHRA quickly.
There are three main rules to follow when setting a contribution amount.
First, the same terms must be offered to each employee. This may mean, for example, that you offer a reimbursement of up to a maximum amount per month. If you offer to pay 50% of premiums for the employee and any dependents, this may result in an employee with a spouse and children receiving more financially than an employee without dependents. This still meets the requirements of the plan because they are receiving a benefit under the same terms—50% of the premium is being paid. What you cannot do is pay 100% of premiums for managers and 50% for the rest of your staff. The terms of the benefit must be the same for everyone. Here’s more information on meeting the QSEHRA “same terms” requirement.
Second, you must adhere to set maximum annual benefit caps. The maximum individual amount is $4,950, and maximum for an employee and family contribution is $10,000. The annual maximum must be prorated for employees who are not working a full year, meaning if someone starts mid-year you cannot bump up their monthly contribution amounts to allow them to receive the full yearly amount.
Third, the cost of the QSEHRA benefit must be entirely covered by the employer. QSEHRA is not a shared cost between the employer and employee. The employee already has the medical expenses, and the purpose of the QSEHRA is to provide employer-sponsored reimbursement. Therefore, you cannot reduce the amount of an employee’s pay as a result of them accepting the QSEHRA benefit.
Notice of Coverage
If you begin offering a QSEHRA benefit, how should you implement it? There’s a rule for that! Notice of QSEHRA availability must be provided to the employee at least 90 days in advance of the start of the year, or the start of the new employee’s eligibility. Because issuing a notice 90 days in advance of the 2017 calendar year is not possible based on the effective date of the law, employers will be in compliance as long as they issue a 2017 notice by March 13, 2017 (within 90 days of the law being signed).
The notice is required to include specific criteria:
- The amount of the employee’s yearly benefit eligibility;
- That the employee is required to report the benefit when applying for renewing coverage purchased through an exchange/marketplace; and
- That the employee will pay taxes on QSEHRA payments if the employee fails to maintain health insurance coverage during any period when they are receiving the QSEHRA payments.
The requirements of the notice are highly specific, and failure to provide proper and timely notice to employees can result in financial penalties. Once again, we recommend working with a qualified advisor to ensure you are in full compliance with the law.
Eligibility for QSEHRA
Notice of the benefit must be given to all eligible employees. Unfortunately, you don’t get a lot of say on eligibility. The law requires that if you offer a QSEHRA benefit, you offer it to essentially everyone on your team.
You are only able to exclude the following individuals from this benefit:
- Employees who have not completed 90 days of service
- Employees under age 25
- Part-time and seasonal employees
- Union employees (unless the union agreement provides for eligibility)
- Non-resident aliens without income from sources within the United States
This means that your regular, full-time employees are all eligible for the plan. This does not allow you to offer different levels of benefits for different types of employees. However, group health plans generally do not allow you to do so, either.
Employee Proof of Coverage
For the employee to receive the QSEHRA benefit, they must provide you with proof of insurance coverage, as this is meant to be a reimbursement benefit.
The notice to the employee will warn them that if they let their coverage lapse, in addition to technically not being eligible for your benefit anymore, continuing to receive the QSEHRA benefit means that they will pay taxes on the benefit. When they file their taxes with the IRS, they’ll be reporting on their insurance coverage for the year, and there will be tax ramifications on the employee’s end for receiving the QSEHRA benefit when they were not eligible to receive it.
In addition, if the employee purchases insurance through any of the health exchanges, any tax credits that they will receive are offset by the QSEHRA amounts, as they would otherwise be receiving two subsidies for their insurance. Again, this is a tax issue on the employee’s end.
The QSEHRA plan is a great way to offer a benefit to your employees, especially if a group health plan is unaffordable or unfeasible for your practice. Offering any type of a health benefit can make you more competitive in the job market, and studies repeatedly show that benefits contribute to higher levels of job satisfaction and morale for employees.
Note, however, that a QSEHRA plan must be treated as part of your practice’s benefit package. It needs to be set up as a benefit plan at the start of the year, with defined criteria, and you need to provide information about the plan to your employees just as if you were providing information about a health plan, retirement benefit, or other similar benefits.
As a new law, we’re sure more guidance will be coming from the government and from financial advisors on how to set up these plans effectively and how they can be of benefit to businesses of varying sizes. For now, we are viewing this as great news for small employers, as it has been extremely difficult to offer a benefit without purchasing a group health plan in recent years. We also anticipate additional changes to healthcare laws over the next few years, and hope they continue to be in the direction of benefiting the employer who is trying to do something good for their employees.
If you’re interested in learning more about QSEHRA, we recommend contacting our partner Take Command Health. They’ve also put together an excellent guide that can help you determine if QSEHRA is a good fit for your practice.