Great news for small employers who want to provide payment or reimbursement for employees’ individual health insurance policies on a pre-tax basis! On December 13, 2016, President Obama signed into law the 21st Century Cures Act (“Act”). This Act includes a section allowing qualified small employers to offer a new type of health reimbursement arrangement (“HRA”) to employees effective January 1, 2017 (Two requirements of the Affordable Care Act previously prohibited most stand-alone HRAs.). The new arrangement is called a qualified small employer health reimbursement arrangement (or a “QSEHRA”).
Only employers who employ fewer than 50 full-time equivalent employees and do not offer a group health plan to any employee will be allowed to reimburse an employees’ eligible medical care expenses through a QSEHRA. The QSEHRA must:
1. be provided on the same terms to all eligible employees of the eligible employer (variation is allowed in the pricing of a policy based on age and number of family members),
2. be funded solely by the employer (no employee salary reduction contributions are allowed),
3. provide for the payment or reimbursement of eligible medical care expenses incurred by the employee or family members (including premiums for individual health coverage) only after the employee provides proof of health coverage, and
4. ensure that, in 2017, annual payment or reimbursement does not exceed $4,950 ($10,000 if family members are covered under the HRA). (These amounts could change in future years.)
An eligible employer funding a QSEHRA must provide a notice to eligible employees not later than 90 days before the beginning of the year or the date the eligible employee is first eligible to participate in the QSEHRA. The Act describes the specific information that must be included in the notice. If an employer offers a QSEHRA in 2017, it must provide the required notice not later than 90 days after the date of enactment of the Act – by March 13, 2017.
A few additional points to note – the employee must have minimum essential coverage (as defined under the Affordable Care Act) in order for the payment or reimbursement to be tax-free. Reimbursement amounts may reduce the amount of premium tax credit/marketplace subsidies available to eligible employees, and if the QSEHRA provides “affordable coverage” (as defined under the Affordable Care Act), employees will not be eligible for a marketplace subsidy. The employer must report QSEHRA reimbursement amounts on employees’ Forms W-2. The Act also extends transitional relief provided under Notice 2015-17 to employer payment plans for plan years beginning on or before December 31, 2016.