On October 31, the IRS issued Notice 2017-67, detailing requirements for the qualified small employer health reimbursement arrangements (QSEHRAs) implemented last December by the 21st Century Cures Act. The law removes from the definition of “group health plan” reimbursement arrangements that follow the law’s requirements. Removing such plans from the definition of “group health plan” means exempting them from the requirements of Affordable Care Act's market reforms, including the “no annual dollar limits” and “no cost sharing for preventive health services.” Thus, by following the requirements of this law, eligible small employers may offer stand-alone HRAs to their employers without being subjected to onerous excise penalty under section 4980D of the Internal Revenue Code.
Note: Although QSEHRAs may be useful for some small employers, for others they may not. The plans are likely most beneficial if employees have individual health insurance under a grandfathered plan. If employees must buy coverage on the Marketplace, the QSEHRA may make them ineligible for a premium tax credit (PTC) or merely reduce the PTC to which they would otherwise be entitled. If an employee has insurance coverage through a spouse’s employer, the QSEHRA may reimburse for those premiums. If the spouse can pay those premiums on a tax-free basis, however, the QSEHRA reimbursement is taxable. In other words, the employer could provide the same economic benefit to the employee by raising wages.
To qualify as a QSEHRA, the plan must meet the following requirements:
Notice 2017-67 reiterates that if the requirements for a QSEHRA are not followed, the plan is a “group health plan” subject to market reform requirements and a penalty up to a $100/day/employee.
An arrangement that reimburses premiums will not fail to qualify as “providing the same terms to all eligible employees” if the benefit amount varies only (1) because of the age of the eligible employee or family member or (2) because of the number of family members of the eligible employee with respect to the same insurance policy. Likewise, an employer may offer a single benefit to both single employees and employees with a family, or the employer may offer a single benefit to single employees and a family benefit to employees with a family.
Notice 2017-67 clarifies that an employer may provide a QSEHRA to its employees and contribute to an employee’s HSA. This is possible, however, only if the QSEHRA reimburses premiums only. Employees with an HRA that reimburses medical expenses are not eligible for an HSA.
Notice 2017-67 specifies that there are no employee opt-outs when it comes to QSEHRAs. Section 9831(d)(2)(A)(ii) requires that the eligible employer provide, rather than offer, a QSEHRA on the same terms to all eligible employees. A QSEHRA is provided to an employee, whether or not the employee receives any reimbursements under the plan. This is impactful to employees who purchase their insurance on the Marketplace.
Small employers must understand that employees covered by a QSEHRA will be ineligible for a premium tax credit on the Marketplace if the QSEHRA is deemed to be affordable employer coverage. Specifically, a premium tax credit will be denied if the cost to the employee to purchase the second lowest cost silver plan for self-only coverage on the Marketplace MINUS the amount of the QSEHRA reimbursement does not exceed 9.69 percent of the employee’s household income (for 2017).
Note that the affordability is calculated only with respect to the cost of the self-only coverage. The cost of the family coverage may be much more expensive, but the employee will still be ineligible for the premium tax credit if the cost of the self-only coverage (after factoring in the reimbursement) does not exceed 9.69 percent of the employee’s household income.
If the QSEHRA is not affordable coverage, the PTC will be allowed, but reduced by the amount of the permitted benefit.
In January, an employee’s permitted benefit will be shown in W-2 Box 12, Code FF. Notice 2017-67 affirms that the full amount permitted (not the amount actually reimbursed) is shown on the W-2.
Warning: Notice 2017-67 states that the Marketplace is not considering QSEHRA amounts when calculating Premium Tax Credits. This means that employees covered by a QSEHRA may go the Marketplace and receive an APTC unaware that they may have to pay that credit back if the QSEHRA is affordable coverage.
Practitioners will be responsible to reconcile overpayments of the premium tax credit via Form 8962 when filing returns for the tax year in which the overpayment was made.
Employees covered by a QSEHRA must have Minimum Essential Coverage or else reimbursements from the QSEHRA will be fully taxable to the employee. If the employee is covered by MEC (equivalent to a marketplace Bronze plan), the reimbursement provided under the QSEHRA will be excluded from income under IRC § 106.
Notice 2017-67 provides that:
Employers offering QSEHRAs to their employees must provide all eligible employees with notice not later than 90 days before the beginning of the plan year (or for an employee not eligible on the first day of the plan year, the date the employee is first eligible). The notice must state:
Willfully failing to provide notice to eligible employees subjects the employer to a $50 per employee, per incident penalty, up to a maximum of $2,500 for all violations in a calendar year. Notice requirements were temporarily delayed by IRS Notice 2017-20.
Notice 2017-67 specifies that if an employer provided a QSEHRA during 2017 or 2018, it must furnish the initial written notice to its eligible employees by the later of:
(a) February 19, 2018, or
(b) 90 days before the first day of the plan year of the QSEHRA.
A sample notice is provided in the guidance.
The law extended the transition relief provided through Notice 2015–17 to any plan year beginning on or before December 31, 2016. The provision specifically excludes QSEHRAs from ERISA and COBRA requirements. Notice 2017-67 specifies that employers providing QSEHRAs are not responsible to file a Form 1095-B. They must, however, file Form 720 and pay the PCORI fee.
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