On December 13, 2016, Congress passed the 21ˢᵗ Century Cures Act (“Cures Act”) amending provisions of the Internal Revenue Code, ERISA, and the Affordable Care Act (“ACA”) to allow small employers to offer reimbursements to their employees for the purchase of health insurance coverage. Previously released guidance prohibited such arrangements because they were considered a type of “group health plan” ¹ that violated several of the market reform requirements of the Affordable Care Act (“ACA.”)
The Cures Act provides a statutory exemption for a new type of plan called “Qualified Small Employer Health Reimbursement Arrangement” (“QSEHRA”) effective January 1, 2017. Under this type of arrangement, an employer may provide reimbursement to employees for eligible expenses for medical care, including the purchase of individual insurance coverage or coverage purchased through a health insurance exchange.
To qualify, the arrangement must meet several requirements. The threshold requirement is that QSEHRA plans are only available to employers that do not qualify as an “Applicable Large Employer” for purposes of the ACA.
An “eligible employer” may only sponsor a QSEHRA if it does not also sponsor a group health plan. The QSEHRA must be solely funded by the employer; i.e., no employee salary reduction is allowed. The employer must provide the benefit equally to all eligible employees.² The employer may fund up to $4,950 (for individual) and $10,000 (for family) coverage per employee, as adjusted for inflation.³ Certain variations in benefits among employees are permitted for variations in the price of an insurance policy in the individual health insurance market based on the employee’s (or family member’s) age and family size. Any amounts reimbursed should be reported on an individual employee’s Form W-2 each year. Employees are required to substantiate health coverage payments prior to receiving reimbursement from the employer.
Employers must provide written notice of the program to eligible employees at least 90 days prior to the beginning of the plan year, or when an employee first becomes eligible to participate, if later. The notice must include:
A description of the amount the employee is eligible to receive as reimbursement;
A statement that the eligible employee must inform any health insurance exchange of any employer reimbursements arrangements if the employee applies for advanced payment of any premium assistance tax credits; and
Information about the potential adverse tax consequences of failure to obtain health insurance coverage that does not provide minimum essential coverage (“MEC.”)
Failure to provide the required notices can result in a $50 per employee tax, not to exceed $2,500 annually, and could violate ERISA.
Employees who use their QSEHRA benefits to purchase MEC will receive a reimbursement that is excluded from gross income. However, for any month that the employee does not obtain MEC, the employee will be taxed on amounts reimbursed for that coverage. Amounts offered to an employee through such an arrangement will reduce the amount of premium assistance credit the employee may have previously received.
¹ Under Code Section 5000(a), the term “group health plan” means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.
² The Act defines an eligible employee as an employee who has completed 90 days of service. However, employers may exclude the following employees from participation: (1) those employees who have not attained age 25, (2) part-time or seasonal employees; (3) union employees, unless the benefit is bargained for, and (4) non-resident aliens who receive no U.S. source income.
³ These amounts may be prorated for employees working less than a full year.
© Boutwell Fay LLP 2016, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of December 31, 2016.