By D|K’s Labor and Employment Team
Under a new law signed by President Obama on December 13, 2016, qualified small employers may now contribute to health reimbursement accounts (HRA’s) to help employees with eligible medical expenses, including health insurance premiums. This change provides small employers who do not offer group health plans with a new option for assisting their employees with the cost of health care.
The 21st Century Cures Act signed last year overrides the prior IRS and DOL interpretations and creates a new category of HRA. Qualified Small Employer Health Reimbursement Accounts (QSEHRA) may be established by applicable small employers who are not otherwise required to provide group health coverage to their employees. Under a QSEHRA, an eligible employee can receive reimbursement for:
- IRS-approved out-of-pocket medical expenses, and
- health insurance premiums, including for premiums paid under plans purchased on health care exchanges
Requirements for QSEHRA’s
Eligible Employees. A small employer who opts to offer QSEHRAs must provide accounts for all of its eligible employees, except:
- Employees who are younger than age 25.
- Employees who have worked less than 90 days for the employer.
- Part-time or seasonal employees.
- Nonresident alien employees with no domestic earned income.
- Employees covered by a collective bargaining agreement that includes health and welfare benefit provisions.
Employees receiving contributions to QSEHRA’s must maintain and provide their employers with proof of non-group health plan coverage that provides “minimum essential coverage” as required under the ACA. If an employee does not maintain such coverage, reimbursements received from a QSEHRA will be taxable to the employee.
Contributions. QSEHRA’s can only accept employer contributions; no employee contributions are permitted. Currently, an employer can contribute up to $4,950 for eligible employees with single coverage and $10,000 for those with family coverage. Employers can contribute less than the maximum limits annually. The employer may also prorate contributions for employees who are hired or become eligible mid-year.
Offered on a Uniform Basis. Under the QSEHRA rules, an employer must generally make uniform contributions to the accounts of all eligible employees, although actual contribution amounts may vary based on the actual cost of each employee’s premiums, which may vary based upon the employee’s age and number of covered family members. So, small employers can choose to contribute a flat amount or a uniform percentage of each employee’s actual costs, up to the annual maximum limits discussed above.
Notice to Employees. Before establishing and contributing to QSEHRA’s, a small employer must provide all eligible employees with a written notice that explains the possible consequences of receiving reimbursements from the accounts. This notice must be provided at least 90 days before the start of the plan year for which contributions are being made or the date on which the employee becomes eligible. The notice is required to:
- Describe the amount of contributions to be made for the plan year.
- Direct employees to disclose contribution amounts when applying for or renewing coverage under a health care exchange.
- Explain that employees may owe income tax on reimbursements from the QSEHRA and be subject to other penalties if they fail to maintain non-group health plan coverage.
The new law imposes a penalty for failing to provide timely notice of $50 per employee, up to $2,500 in a plan year.
Employers must include QSEHRA contribution amounts on an employee’s Form W-2, although such amounts should not be included in taxable wages. In addition, the employer must provide each employee with Form 1095-B (which is used to show the value of employer-provided health benefits) and report contribution amounts to the IRS.
If you have any questions about this article, please contact your Davis & Kuelthau attorney.