President Signs Legislation Authorizing Stand-Alone HRAs for Small Employers
by Vita, on December 16, 2016
The President has signed legislation allowing small employers with no group health plan to offer their employees a stand-alone health reimbursement arrangement (HRA) to help pay for medical care expenses—including Exchange coverage. The legislation also covers a broad range of other health-related topics, including medical research, drug development, mental health care, and Medicare. Here are highlights of the small employer HRA provision and other provisions that may affect employers and their advisors.
- Qualified Small Employer HRAs. The legislation establishes a new type of HRA called a qualified small employer health reimbursement arrangement (QSEHRA) that is not considered a group health plan for almost all purposes under the Code, ERISA, and the Public Health Service Act (PHSA). QSEHRAs, which are generally available for years beginning after 2016, must satisfy the following criteria:
- Be 100% employer-funded (no salary reductions)
- May not be excluded from income unless the recipient has minimum essential coverage
- Can only be used to pay for medical care expenses of eligible employees and their covered family members after the employee has provided proof of coverage
- Qualifying Employers. QSEHRAs may be offered only by employers that do not offer a group health plan and are not “applicable large employers” (ALEs). This means employers that are not subject to the Pay or Play provisions of the ACA (under 50 full-time equivalent employees).
- Eligible Employees. QSEHRA benefits generally must be offered on the same terms to all employees, with limited exceptions. Those exceptions include employees with fewer than 90 days of service, those under age 25, and certain part-time and seasonal employees.
- Benefit Amount. Annual benefits cannot exceed an indexed maximum of $4,950 per year ($10,000 if family members are covered) and must be provided on the “same terms” to all eligible employees. However, differences are permitted in accordance with price variations based on age or number of covered family members for a benchmark policy “in the relevant individual health insurance market.”
- Notice Requirement; W-2 Reporting. Employers offering a QSEHRA must give an annual notice to eligible employees at least 90 days before the start of the year or the employee’s initial eligibility date, or within 90 days after the legislation’s enactment, whichever is latest. Employees’ permitted benefits must be reported on
Form W-2. The annual notice must contain the following:
- The dollar figure the individual is eligible to receive through the QSEHRA
- A statement that the eligible employee should provide information about the QSEHRA to the Marketplace or Exchange if they have applied for an advance premium tax credit
- A statement that employees who are not covered by minimum essential coverage (MEC) for any month may be subject to penalty
- Coordination with Health Care Reform. QSEHRA benefits that meet the law’s special definition of “affordable coverage”—which measures the extent to which the QSEHRA benefit would reduce the premium of the second lowest-cost silver plan in the relevant individual health insurance market below 9.5% of the employee’s household income—may prevent covered individuals from receiving premium tax credits. QSEHRA benefits will also be taken into account when determining the tax on high-cost health coverage (the “Cadillac tax”).
The QSEHRA provisions allow small employers that are not subject to health care reform’s Pay or Play provisions to offer some relief for employees’ health care costs without having to provide a group health plan. The new law sidesteps health care reform guidance prohibiting the pre-tax funding of individual policies. Target employers who will benefit the most from this new law will be small employers with a high percentage of lower income wage earners who do not provide group health insurance. This will allow them to provide supplemental health insurance funding for employees who go to the Exchange and receive a subsidy for their health insurance. Please note that QSEHRAs do NOT allow for reimbursement of individual premiums.
The prospect of fundamental changes to health care reform under the Trump administration creates some uncertainty regarding the ultimate impact of this legislation.