Brokerage Ops the December 2017 issue

New Health Benefit Option for Small Employers

Agencies issue guidance on QSEHRAS. Here’s what you need to know.
By Kate Jensen Posted on January 10, 2018

QSEHRAs are not group health plans—and therefore are not regulated as such or subject to group market reform requirements (with some exceptions for wrongful disclosure of individually identifiable health information).

The Affordable Care Act implementing agencies have now released guidance on QSEHRAs (see FAQS about ACA Implementation (Part 35) Q&A-3 and IRS Notice 2017-67).  Notably, they clarify, QSEHRAs are not subject to the agencies’ prior guidance, which concluded that non-integrated HRAs violate various ACA requirements like the prohibition on annual dollar limits and provision of preventive services without cost-sharing.  Below is a run-down of the primary features of these new arrangements.

What are the benefits of QSEHRAs for eligible employees?

  • Payments from QSEHRAs to reimburse employees’ medical expenses are not included in those employees’ gross income if they have minimum essential coverage (MEC);
  • QSEHRA funds may be used to pay for premiums for other health coverage, along with other expenses related to medical care; and
  • Employees and their family members are still eligible for premium subsidies on an exchange if a QSEHRA does not constitute affordable coverage).

Who can take advantage of QSEHRAs?

Only employers that are not applicable large employers (ALEs) under the employer mandate definition/regulations (i.e., those with fewer than 50 full-time or full-time equivalent employees) and do not offer a group health plan to any of their employees may offer QSEHRAs. In this context, group health plans include traditional HRAs, health flexible spending arrangements (FSAs), and plans that provide only excepted benefits (e.g., vision or dental).  Generally, the guidance cautions, “if an employer endorses a particular policy, form, or issuer of individual health insurance, the coverage may constitute a group health plan.”  This would not, however, extend to providing information to employees about the exchanges or availability of the premium tax credit. 

Eligible employees generally include any employee of the employer, but the arrangement may exclude individuals who have not been with the employer for 90 days, seasonal or part-time workers, workers under the age of 25, and nonresident aliens.

What’s the fine print?

QSEHRAs must have the following features:

  • Be funded solely by an eligible employer with no salary reduction contributions;
  • After an employee provides proof of MEC, provide for payment or reimbursement of qualified medical expenses (defined as expenses for “medical care” as described in 26 U.S.C. 213(d)) for the employee or the employee’s family members up to $4,950 per year for single coverage or $10,000 for family coverage, indexed for inflation after 2016; and
  • Be provided on the same terms to all eligible employees.

Notably, if an arrangement fails to be a QSEHRA because one or more requirements are not satisfied, the arrangement becomes a group health plan and is subject to requirements and penalties associated with such plans.

As discussed in detail in IRS Notice 2017-67, there are several disqualifying acts/events of which employers should be aware under the QSEHRA rules, particularly with respect to maintaining “eligible employer” status and satisfying the basic parameters defining QSEHRAs.  Under the same terms requirement, for instance, the maximum payment/reimbursement amount under the arrangement may vary from employee to employee based only on the age or the number of covered individuals.  Moreover, the QSEHRA must be operated on a “uniform and consistent basis” and eligible employees may not be offered a choice between permitted benefit options (e.g., between a premium reimbursement option versus a reimbursement for non-premium medical expenses option).

There also are hefty administrative requirements associated with these arrangements. For instance, because the tax advantage of these arrangements hinges on an employee having MEC, employers may not provide QSEHRA reimbursements to employees who have not provided annual proof of MEC for all individuals taking advantage of the QSEHRA. Such proof may be in the form of third-party documentation or attestation by the employee. Following initial/annual proof of coverage, with each new request for reimbursement during the same plan year, at a minimum, the employee must attest that she or he still has MEC.  In addition, to ensure that all reimbursements are for “medical expenses,” all claims for payment from the QSEHRA must be substantiated (using the rules for FSAs).

The rules also entail employer reporting requirements. For example, employers who provide QSEHRAs are required to provide written notice to all eligible employees at least 90 days before the beginning of each year (or when an employee becomes eligible).  Failure to provide proper notice may result in a penalty of $50 per employee.  Also, an employee’s W-2 must reflect the amount an eligible employee is entitled to receive from the QSEHRA in the calendar year.

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