QSEHRA: A New Healthcare Reimbursement Option for Small Employers

QSEHRA paperworkIt 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.

Contribution Amounts

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.

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.

Final Thoughts

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.

Comments

  1. Steve Rabedeaux says

    This is great news. Is this an area CEDR is going to be able to help with, or do we need to find a vendor to craft a plan?

    • Paul EdwardsPaul Edwards says

      Steve- This is something for your accountant or CPA to address as it’s about being able to contribute pre-tax. Once they explain to you how it works then it’s up to your payroll company to make the credit for the benefit show up as pre-tax.

      If I understand the new rule it means that if you decide to give them any amount they get the entire amount and nether side has to pay the payroll taxes. (please check with your CPA for confirmation)

  2. says

    Did I understand you to say the plan has to be set up on 1/1, or can an employer implement later on in the year? Also, do you have to offer the max amounts allowed under the law, or can it be any amount up to the limits, provided of course that all employees are treated equally? Finally, does the employer have to file forms re the plan with the IRS, or other gov body, or is this all controlled via the W-2?

    Thanks ……….an excellent article

    Bill

  3. Jen says

    Can and employer choose to give each employee an QSEHRA of a flat $500 regardless of single or family coverage?
    What if the employee has coverage sponsored by their spouses employer? Could the QSEHRA plan be written to only reimburse premium paid and therefore the employee who has coverage through his/her spouse would not receive a benefit from the QSEHRA?

  4. Paul Edwards says

    Jen- I am going to point you at your CPA for the answer the second part of your question in detail.

    1) Yes, you can choose to give a fixed amount contribution pre-tax.
    2) Part of the rules implies that if the person is receiving a pre-taxed contribution for having health insurance, they are supposed to use it for that. In fact, you can require them to show proof of using it for that purpose. I would ask you to speak with your CPA regarding the IRS rules that govern the contribution. For sure, if they were not to use it for health insurance, it should be taxed.

  5. says

    If an employer reimburses other medical expenses per IRS 213(d) but not the actual health insurance premium, does an employee receiving tax credits (subsidy) on premiums through the exchange have to report those reimbursement to the exchange?

    • PaulEdwards says

      Martin- We are unable to find a good definition of “what is part time” within the regulation. It actually kind of frustrating. I can share that we’ve seen a few CPA’s and attorneys refer to the tax code in their posts, and they are pulling out the number of 25 or less hours per work week.

  6. Joe says

    Thanks for the Article Paul. You stated “you cannot reduce the amount of an employee’s pay as a result of them accepting the QSEHRA benefit. However, when the ACA made giving reimbursements illegal, we gave employees raises in order to continue helping with their insurance. Our employees understood that the raise was compensation for their health care costs. If we are to implement QSERHRA, would we not be able to bring them back to their pay rate before the ACA was enacted?

    • Paul says

      Hi Joe. This is still a very new law and we aren’t aware of any specific guidance from the government about this scenario, so we cannot say for sure. My best answer would be it depends on a variety of factors, and how well documented and clearly communicated this was to your team *at the time of the change.* However, you also need to be aware that employees may now simply be used to receiving those additional funds as part of their pay, and may not respond in a positive way to what they view as a pay cut. For these reasons, it’s hard to know how safe this action would be without a more in-depth analysis of your specific situation. I recommend that you contact an HR advisor or employment law attorney in your area to discuss your options before you do anything.

  7. Bobbi Kaelin says

    Question: Can the QSEHRA reimbursement be designed to ONLY reimburse for the insurance premium (and not other section 213(d) expenses)?

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