Effective January 1, 2017, small employers (less than 50 employees) can offer employees reimbursement of medical expenses to include personal health insurance premiums on a tax-free basis. These new programs are called “qualified small employer health reimbursement arrangements”, or “QSEHRA’s” for short.
Many smaller employers had previously reimbursed employees for personal health insurance premiums on a tax-free basis until the Affordable Care Act/Obamacare required that tax-free HRA accounts be “paired” with employee group insurance offered by the employer. Most employers who had been reimbursing employees for their personal health insurance premiums were not also offering group insurance. Tax-free reimbursement of health insurance premiums had been used by employers for over 50 years based on IRS Revenue Ruling 61-146. This long-used benefit strategy was essentially “killed” January 1, 2014 by various provisions of the ACA.
QSEHRA – NOT YOUR DADDY’S HRA!
Congress passed legislation late 2016 which created “Qualified Small Employer HRA’s”, effective in 2017. Employers eligible for the new QSEHRA program need to meet the following conditions:
- The employer must employ less than 50 employees;
- The employer must not be offering an employee group insurance plan;
- The employer must offer the HRA reimbursements on “similar terms/similar reimbursement amounts” to all full-time (30+ hours per week) employees who have been with the employer for at least 90 days and are at least age 25;
- The employer must provide “notices” to employees about the QSEHRA benefits and also report the annual reimbursement amounts on the employee W-2 forms (as non-taxable HRA benefits).
UNLIKE THE FORMER TAX-FREE PERSONAL INSURANCE PREMIUM REIMBURSEMENTS BEFORE THE ACA, the brand new QSEHRA’s have a few significant disadvantages as follows:
- An employer must offer the reimbursements to virtually all full-time employees “on the same terms” — Gone are the days of negotiating customized tax-free insurance reimbursements with specific employees. A very defined “non-discriminatory” theme permeates the new 2017 version of health reimbursement arrangements. All for one, one for all (which could “beg the question”, why not traditional group insurance instead of QSEHRA’s?);
- Employees who are purchasing personal health insurance from the “marketplaces/exchanges” must reduce their subsidies/premium tax credit amounts by the amounts of the offered QSEHRA program. An employer considering a QSEHRA program needs to survey their employees to determine which employees would lose federal tax credit subsidy amounts based on their offered QSEHRA amounts. This program is generally not advisable for an employer who has several employees who qualify for insurance premium subsidy on the ACA exchanges; and
- The old Revenue Ruling 61-146 tax-free insurance reimbursements involved minimal “red tape.” The new QSEHRA program involves notices from employers to employees, reporting of HRA benefits on employee W-2s (a new “Box 12” code will likely be used), notices from employees to the ACA marketplace if they are receiving subsidies, and accounting for employee reimbursement amounts as compared to the maximum legal annual amounts ($4,950 for employees only and $10,000 annual benefit amount for employee/family coverages.)
ADVANTAGES OF THE NEW HRA ACCOUNTS
- All QSEHRA benefits are tax-free. Many employers now are simply paying employees more taxable wages so they can purchase insurance and pay medical expenses “after-tax”. The tax-free aspect of the QSEHRA benefits saves employers 7.65% in taxes and employees save 25-35% of the benefits in taxes;
- The QSEHRA program enables employers to “fix” or “define” their costs at whatever monthly reimbursement amounts the employer chooses (but not to exceed the monthly $412.50/$833.33 tax law caps in QSEHRA benefits allowed). Employers could view this cost certainty as an advantage over the annual pricing of group insurance plans (in essence, the risk of increasing insurance premiums is shifted from the employer to the employee);
- Although not a group insurance plan, the QSEHRA program is a meaningful medical benefits plan which smaller employers can use for recruitment and employee retention.
A KEY CONSIDERATION
Before an employer adopts a QSEHRA program, we recommend that the plan benefits, insurance coverages/networks and costs be compared to group insurance options. Some benefits brokers have told us that both the networks and pricing available in group insurance plans are better than options for individual insurance policies. Options available for both personal and group insurance seem to be constantly changing as insurance companies both enter and exit various marketplaces.
IN CONCLUSION
Several smaller employers have asked us about the new HRA programs which became law this year. In many cases, the employers have discovered that the new HRA/insurance reimbursement accounts are far less attractive than their previous, before ACA, reimbursement plans. It is still too soon to determine how many smaller employers will adopt and use the new QSEHRA programs.
As an employer considers whether to adopt a QSEHRA plan for 2017, they should also carefully review coverage, cost and “network” options available with group insurance plans.
If you would like more information about the brand new QSEHRA plans, we have some very detailed “Q & A” information that can be emailed to you upon request. If you actually adopt a QSEHRA, please let us know so that we can gather the benefit information needed for 2017 employee W-2 forms.