Qualified Small Employer Health Reimbursement Arrangements – Maybe Better Than We Thought
By Kara Backus and Thomas I. Kramer - Bullard Law
May 4, 2017
In December 2016, Congress passed and President Obama signed the 21st Century Cures Act, which created qualified small employer health reimbursement arrangements (QSEHRAs). This Alert reviews how QSEHRAs may be used, in light of different laws in Oregon and Washington.
QSEHRAs appear to have been created to deal with the following problems:
- The Affordable Care Act (ACA) prohibits annual limits on essential health benefits and the Internal Revenue Service has ruled that employers may not pay or reimburse employees for premiums paid for individual health insurance policies. So, employers may not simply set aside funds in a health reimbursement arrangement (HRA) that employees may use to pay or reimburse themselves for individual health insurance premiums.
The ACA authorized state health insurance exchanges to open a small business health options program (SHOP), which would permit employees to choose among “qualified health plans” from the exchange and permit employers to subsidize, with pre-tax dollars, employees’ premiums for coverage under such a plan. While some states, like Washington, have such a program, others, like Oregon, do not.
The Good (Mostly)
QSEHRAs are intended to serve as a nontaxable account in which eligible small employers may set aside pre-tax dollars that employees may use to pay or reimburse themselves for medical expenses. Here is an overview of the rules for QSEHRAs:
A QSEHRA-eligible employer is one that is not an “applicable large employer” (which generally means that the employer had fewer than 50 full-time-equivalent employees in the preceding calendar year) and does not offer a group health plan to any of its employees.
A QSEHRA may reimburse employees for medical expenses, as defined in the Internal Revenue Code, including individual insurance premiums (but see below (“The Ugly”)).
Before the QSEHRA reimburses any expenses, the employee must provide “proof of coverage.” The QSEHRA reimbursement is not subject to income or employment taxes to the employer or employee if the employee has “minimum essential coverage” at the time (almost any medical insurance coverage qualifies as minimum essential coverage).
The maximum reimbursement for 2017 is $4,950 if the QSEHRA reimburses just the employee’s own expenses and $10,000 if the QSEHRA reimburses the employee’s and family members’ expenses. The limit is prorated based on the number of months the employee is covered by the QSEHRA during the year.
The QSEHRA must be “funded” exclusively by the employer. Employees may not be permitted to contribute to it.
The QSEHRA must offer reimbursement of eligible expenses on the same terms for all eligible employees. The QSEHRA may exclude employees who have not completed 90 days of service and reached age 25, part-time and seasonal employees and employees covered by a collective bargaining agreement that doesn’t provide for participation.
Employers must notify eligible employees about the QSEHRA at least 90 days before the beginning of each plan year and upon initial eligibility.QSEHRA coverage will adversely affect employees’ eligibility for premium subsidies for individual insurance policies bought through a state health insurance exchange. The extent of the adverse effect depends upon whether the individual health insurance is “affordable” after factoring in the QSEHRA benefit. If health insurance is affordable after factoring in the
QSEHRA benefit, the employee loses entitlement to the premium subsidy altogether. If health insurance is not affordable after factoring in the QSEHRA benefit, the employee’s monthly premium subsidy is reduced by one-twelfth of the employee’s annual QSEHRA benefit.
So, a limited class of employers may offer a limited benefit to employees. This can be altogether beneficial for employees who wouldn’t otherwise receive premium subsidies to buy individual health insurance. Whether it’s beneficial to an employee who would otherwise receive premium subsidies depends on the amount of subsidy lost relative to the QSEHRA benefit.
The Ugly (with a ray of hope in the Oregon Legislature)
A complication is that in Oregon and 13 other western states, including California, Idaho and Nevada (but not Washington), under current law, QSEHRA funds may not be used to pay or reimburse the premium for an individual health insurance policy (but see below for a ray of hope in Oregon created by a bill pending in the Legislature). In light of this complication, this is what we think a QSEHRA now could do for the employees of an Oregon small employer:
For an employee covered under some other employer’s group health plan (such as a plan maintained by the employee’s spouse’s or partner’s employer), reimburse the employee for the required contribution for the employee’s coverage under that other employer’s group health plan as well as any other medical expense, such as deductibles, co-pays, coinsurance and payment for non-covered medical procedures.
For an employee covered under a government-sponsored health program, such as Medicare Part A, Medicaid, TRICARE or a Veterans Administration health program, reimburse the employee for any required contribution for that coverage as well as any other medical expense.
For an employee who buys individual health insurance (not with the QSEHRA funds), reimburse the employee for any medical expenses not covered by insurance (such as deductibles, co-pays, coinsurance and payment for non-covered medical procedures). Employees who purchase individual health insurance through the State’s exchange and receive a premium subsidy will, however, still be subject to the reduction in the subsidy, as discussed above, even though the QSEHRA cannot be used in Oregon to pay for the coverage itself.
The ray of hope in Oregon comes from a bill Governor Brown introduced in the current legislative session that would permit QSEHRA funds to be used to buy individual health insurance. If that bill were to pass, eligible Oregon employers, like Washington employers now, could use a QSEHRA to subsidize their employees’ purchases of individual health insurance through a state exchange. The bill carries an “emergency” tag, meaning that it would take effect upon signature by the Governor.
A QSEHRA may be a tool some small employers can use to help their employees cover their medical expenses, but obviously a tool that must be used with care.