What is QSEHRA?
Federal law permits the establishment of Qualified Small Employer Health Reimbursement Arrangement (“QSEHRA”) for plan years beginning after December 31, 2016. The following explanation is an overview of the basic rules for establishing a QSEHRA, which allows employers to reimburse employees pretax dollars for individually purchased medical insurance premiums.
The requirements to be a QSEHRA are as follows:
Eligible Employer: A small employer (i.e., an employer with less than 50 full-time employees or full-time equivalent employees, determined on a controlled group basis) is eligible to establish a QSEHRA if it:
- is not subject to the employer mandate under the Affordable Care Act (is not an Applicable Large Employer (ALE), and
- does not offer a group medical plan to any employees.
Since one of the requirements for having a QSEHRA is that the employer cannot offer health coverage, an employee either will have to purchase an individual policy (through private insurance or on the Marketplace) or be covered by the medical coverage of the employee's spouse or a parent.
The QSEHRA must be funded solely by employer contributions. Employee salary reduction contributions are not permitted.
The QSEHRA can pay and reimburse for medical care expenses, as defined in Internal Revenue Code (Code) Section 213(d) (including premium payments for individual medical coverage insurance policies covering the employee or enrolled family members, whether purchased from a broker or through the Marketplace). Premiums for dental and vision coverage cannot be reimbursed. For any Plan year, employees can submit claims during a runout period specified by the employer. In addition, employees can be allowed to carryover unused amounts to the next plan year.
For any medical care expense reimbursed by the QSEHRA to be nontaxable, it must be substantiated. Claims must be substantiated with two items:
- information from an independent third party describing the service or product, the date of the service or sale, and the amount of the expense; and
- a statement from the participant providing that the medical expense has not been reimbursed and that the participant will not seek reimbursement for the expense under any other health plan coverage.
Annual Benefit Cap
The amount of payments and reimbursements from the QSEHRA for a plan year cannot exceed $5,050.00 for 2018 for individual coverage of the employee or $10,250.00 for 2018 for family coverage, prorated for partial year coverage. These limits will be increased for cost-of-living adjustments (CPI).
These are just a few of the many questions to ask yourself to determine your compliance levels.
The QSEHRA generally must be provided on the same terms to all eligible employees of the eligible employer. However, benefits under a QSEHRA are permitted to vary in accordance with variations in the price of an insurance policy in the relevant individual health insurance market based on the age of the eligible employee, or the ages of the employee's enrolled family members or the number of enrolled family members. Any such variation must be determined by reference to the same insurance policy with respect to all eligible employees.
Eligible employees, for purposes of the QSEHRA, are all employees of the eligible employer, except that an employer may exclude:
- employees who have not completed 90 days of service,
- employees who have not attained age 25,
- part-time or seasonal employees,
- employees not included in the plan who are covered under a collective bargaining agreement (as long as accident and health benefits were the subject of good faith bargaining), and
- employees who are nonresident aliens and who receive no U.S. earned income.
Generally, not later than 90 days before the beginning of the plan year (or, for an employee who is not eligible to participate as of the beginning of the year, the date on which the employee is first eligible), the sponsor of the QSEHRA is required to provide a written notice to each eligible employee that includes the following statements:
- A statement of the amount of each permitted benefit for which the employee might be eligible. To the extent the permitted benefit varies based on the number of family members covered under the arrangement or their ages, the written notice for an employee may include either each available permitted benefit, or the permitted benefit for which that employee is eligible. In the case of a newly eligible employee whose permitted benefit has been prorated, the written notice must either:
- include the prorated permitted benefit for which that employee is eligible, or
- state that the amounts are prorated based on months of coverage and provide the information necessary to calculate the prorated amount (for example, the permitted benefit amounts and the first month the employee will become eligible to participate in the QSEHRA). The notice must include the date on which the QSEHRA is first provided to the eligible employee.
- A statement that the eligible employee must inform any Marketplace to which the employee applies for advance payments of the PTC, Advance Premium Tax Credits (APTC) of the amount of the permitted benefit. The written notice must state that the amount of the permitted benefit may affect the eligibility for any amount of any PTC and that the employee should retain the written notice because it may be needed to calculate the PTC on the employee’s individual income tax return.
- A statement that if the eligible employee does not have MEC for any month, the employee may be liable for an individual shared responsibility payment for that month, and reimbursements under the QSEHRA for expenses incurred in the month will be includible in gross income.
An employer that fails to provide the required notice (unless shown that such failure is due to reasonable cause and not willful neglect) will be subject to Code Section 6652(o) penalties equal to $50 per employee per each incident of failure, capped at $2,500 for all such failures during a calendar year.
An eligible employer that provides a QSEHRA during 2017 or 2018 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.
Income Tax Treatment of QSEHRA
As long as the employee enrolls in a medical plan (through private insurance, the Marketplace, spouse's or parent's employer) that qualifies as Minimum Essential Coverage (MEC) for the year, the QSEHRA benefit will not count as taxable income. Otherwise, the amount will count as taxable income.
Required W-2 Reporting
The employer must report on Form W-2 the total amount of the benefit for the year for each employee covered under the QSEHRA, regardless of whether the amount is taxable. An eligible employer must report the amount of payments and reimbursements that the eligible employee is entitled to receive from the QSEHRA for the calendar year in box 12 of the Form W-2 using code FF, without regard to the amount of payments or reimbursements actually received.
Coordination with Health Insurance Premium Tax Credit
In general, an employee cannot receive a premium tax credit (i.e., a subsidy for coverage through the Marketplace) if the employee is covered under a QSEHRA that provides affordable coverage. A QSEHRA provides affordable coverage if the premium that would be paid by the employee for self-only coverage under the applicable second lowest cost silver plan minus the employee's benefit under the QSEHRA does not exceed 9.56% for 2018 of the employee's household income. If a QSEHRA does not provide affordable coverage, then the monthly premium tax credit will be reduced dollar-for-dollar by the amount of the monthly QSEHRA benefit.