New health care reimbursement option for small employers

Offering health care reimbursement benefits for employees used to be commonplace; however, with the implementation of the Affordable Care Act, these arrangements are no longer lawful. Employers who fail to meet the insurance reform requirements and continue this practice could face penalties of up to $100 per day for each affected individual.

Now, this is changing. At the end of 2016, President Obama signed the 21st Century Cures Act creating an entity called the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). Effective Jan. 1, 2017, the new law allows small-business owners and employers the option of providing a cost-effective health care reimbursement benefit on a pretax basis.

The QSEHRA benefit option is available to employers who are not defined by ACA as an “applicable large employer” and employ fewer than 50 full-time equivalent employees. An FTE employee in California, as defined by California Health and Safety Code provisions, is “any permanent employee who is actively engaged on a full-time basis … with a normal workweek of an average of 30 hours per week,  for 120 consecutive days or 130 hours per month at the small employer’s regular place of business” and who has met any applicable waiting period requirements.

Small employers will likely find this benefit option attractive, but they should review some features carefully prior to moving forward with offering such a benefit. These include the requirement that a QSEHRA can only be funded solely by direct employer contributions (no permitted employee salary reductions), the nondiscrimination rules (in general, the benefit must be provided on the same terms to all eligible employees) and the requirement that employers are not permitted to maintain another group health plan.

Setting up a QSEHRA: First steps

In brief, employers should determine their contribution amount, prepare a notice to employees about the coverage to be provided to existing eligible employees and new hires and require that participating employees provide proof of insurance coverage. Due to specific requirements, as a best practice, it is recommended that employers work with a qualified CPA or health care law professional when setting up the benefit to ensure compliance with the law.

The cost benefit must be 100-percent employer funded. The plan cannot be a shared expense between employer and employee and the employer cannot reduce an employee’s pay as a result of accepting the QSEHRA benefit.

After the employee provides proof of coverage, the QSEHRA must provide for payment to, or reimbursement of, an employee’s expenses for medical care (as defined by Internal Revenue Code section 213(d)) incurred by the eligible employee or eligible employee’s family members. Qualifying medical expenses are not limited to premiums.

The terms of the plan must be offered universally to all employees, with some permitted exclusions noted here. Some variances may be allowed to reflect variations in the price of a policy due to the age of an eligible employee or the number of family members covered by the QSEHRA. Individuals may be excluded if they:

  • Have not been employed for 90 days.
  • Are under age 25.
  • Work part time or on a temporary basis.
  • Are union employees (unless union agreement provides eligibility).
  • Are a nonresident alien without income sources from within the U.S.

Reimbursements cannot exceed $4,950 per year for an individual or $10,000 per year for family coverage. The amount must be prorated to reflect partial year coverage for employees who do not work a full year.

A written notice of the benefit must be provided to the employee no later than 90 days prior to the start of the plan year. The notice must include:

  • The amount of the employee’s yearly benefit.
  • A statement that the employee is required to provide proof of coverage.
  • A statement that the employees will pay taxes on payments if the employee fails to maintain health insurance coverage during any period they received the QSEHRA benefits.

Because the requirements of the notice are highly specific and failure to provide proper and timely notices can result in financial penalties, it is recommended that employers work with a qualified CPA or health care attorney to set up this plan.

At a time when small-business owners are looking for ways to entice new employees and keep loyal employees with a variety of benefit options, especially when group health care coverage premiums are financially out of reach or unfeasible, a QSEHRA offers an option to remain competitive in the job market.

For help finding a referral to a CPA or health law attorney, contact CDA Practice Support at 800.232.7645.

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