Qualified Small Employer HRAs – New Options for Small Businesses
In order to attract and retain the best talent for their businesses, many small business owners want to provide employee benefits, including health insurance. However, for some small employers, offering a group medical plan is not a viable option, either due to cost or high turnover rates among the rank and file employees. Prior to the passage of the Affordable Care Act (ACA), a common practice for small employers was to directly reimburse their employees for some or all of the premiums paid for individual health insurance policies, under a Health Reimbursement Arrangement (HRA), rather than offer a group health insurance plan. Many employers found this to be a more cost effective means to provide benefits to their employees. However, the Public Health Service Act (PHS Act), provisions of which were incorporated into the ACA, effectively barred this practice, as it violated provisions of the ACA (e.g., the prohibition on annual limits and coverage for preventive services without cost-sharing). Per IRS Notice 2013-54 and DOL Technical Release 2013-03, the penalty for maintaining stand-alone HRAs could reach up to $100 per employee per day, or $36,500 per employee per year.
Fortunately, with the recent passage of the 21st Century Cures Act (“the Act”), small employers will again have the option of reimbursing medical insurance premiums for their employees without implementing a group health insurance plan. Section 18001 of the Act created a new hybrid HRA, known as a Qualified Small Employer Health Reimbursement Arrangement (QSE HRA). This new entity is specifically designed to permit the practice previously observed by many small businesses, reimbursing employees for health insurance obtained individually, without incurring costly penalties.
Eligibility Requirements
Under the Act and Internal Revenue Code §9831(d)(2), a QSE HRA must meet the following requirements:
- It must be offered by an eligible employer – i.e., the company must employ fewer than 50 employees – and the employer must not offer a group health insurance plan to any of its employees, including shareholders.
- It is provided on the same terms to all eligible employees. Certain employees, such as seasonal or part-time workers, may be excluded.
- It is funded solely by an eligible employer. No employee salary contributions may be made to the QSE HRA.
- It provides for the payment of, or reimbursement of, an eligible employee for expenses for medical care (as defined under the Internal Revenue Code) incurred by the employee or the employee’s family members. Further, the payment or reimbursements may only be made after the employee provides proof of coverage.
- The amount of payments or reimbursements for one year does not exceed $4,950 for a single employee (or $10,000 for HRAs covering the family members of employees).
Additional Requirements
Under §9831(d)(4), the employer must provide annual notice to its employees defining which employees are eligible and informing the employees that they must report the benefit amount to the marketplace or state-based exchange, for purposes of determining eligibility for subsidies. In addition, the benefit amount must be reported on employees’ W-2s, although the amounts will not be counted as wages.
Caution
Naturally, the new QSE HRA will require a certain amount of paperwork and record keeping for small employers. Most importantly, under requirement #4 above, the QSE HRA can only pay for documented expenses. Accordingly, employees must submit records to their employers, who should retain those records for a sufficient period of time, in case of audit.
Furthermore, the benefits under a QSE HRA may render an employee ineligible for tax subsidies under the ACA. This will depend on whether the benefit renders the net cost of coverage “affordable” under the provisions of the ACA.
Conclusion
For the small employer who is looking for employee retention strategies and cost savings, a QSE HRA may be a flexible option that will allow the employer to assist its employees in obtaining health care coverage, while avoiding the cost and rigidity of a group plan.
