IRS provides extensive new guidance on Qualified Small Employer Health Reimbursement Arrangements
November 06, 2017
The Internal Revenue Service (IRS) has issued guidance on the requirements for providing a qualified small employer health reimbursement arrangement (QSEHRA), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees.
The guidance covers eligible employers and employees, the "same terms" requirement, the statutory dollar limits, written notice requirement, the minimum essential coverage requirement, reimbursements, reporting, and coordination with the premium tax credit and health saving account requirements. The guidance applies for plan years beginning on and after November 20, 2017.
In late 2016, Congress enacted the 21st Century Cures Act (Cures Act), in part in response to the IRS’s interpretation of the Affordable Care Act (ACA). In Notice 2013-54, the IRS took the view that the ACA market reforms prohibited employer group plans from reimbursing employees for the cost of their individual insurance premiums. Republicans in Congress championed QSEHRAs as way for small employers to continue such reimbursement arrangements by deeming them to be nongroup plans. Then-President Obama signed the legislation, but made sure that QSEHRAs would fit into the ACA’s overall regulatory scheme. The result of the compromise is that QSEHRAs open things up for small employers, but they also have a large number of requirements.
In the new guidance, the IRS explains that, a QSEHRA is not a group health plan, so it is not subject to most group health requirements under the Public Health Service Act, the Code, and ERISA. If an employee has minimum essential coverage (MEC) (as defined in Code Sec. 5000A(f)), payments from a QSEHRA for reimbursement of his or her medical expenses, as defined in Code Sec. 213(d), and which include premiums for other health coverage, are not includible in gross income. The new guidance has an attached list of examples of plans and arrangements that are MEC.
Wide range of topics. The new guidance is in question and answer format, with lots of examples. It covers topics such as eligible employers, eligible employees, same terms requirement, the statutory dollar limit, written notice requirement, the minimum essential coverage requirement, reimbursements, reporting, and coordination with the premium tax credit and health saving account requirements. The IRS plans to issue future proposed regulations based on this guidance.
Eligible employers. The guidance includes information regarding what does and does not constitute an “eligible employer.” An “eligible employer” for purposes of QSEHRAs is one that does not offer a group health plan to any of its employees. However, offering a group health plan to former employees, such as retirees, does not cause the employer to fail to be an eligible employer for QSEHRA purposes, although QSEHRAs themselves may not be offered to retirees or other former employees. So, for example, although COBRA qualifies as MEC, which is required to be eligible for a QSEHRA, former employees covered under COBRA may not be offered a QSEHRA, but a COBRA-covered former employee’s employer could be offer a QSEHRA to its current employees, if all other necessary conditions are met and it is not offering group health coverage to any current employees.
Also, an employer is not an eligible employer for any month during which it offers a group health plan to its employees that would provide coverage on any day of that month. If one employer in a group of employers that is treated as a single employer under Code Sec. 414(b), Code Sec. 414(c), Code Sec. 414(m), or Code Sec. 414(o) offers its employees a group health plan, no other employer in the group will be an eligible employer. An employer does not fail to be an eligible employer just because it contributes to an employees health savings account (HSA).
Prior relief for the written notice requirement. An employer that provides a QSEHRA must furnish a written notice to each eligible employee at least 90 days before the beginning of each year or, for an employee who is not eligible to participate at the beginning of the year, the date on which the employee is first eligible to participate in the QSEHRA. This requirement is enforced by a $50 per employee fine (up to a maximum of $2,500 per calendar year per eligible employer) for failure to provide the written notice.
Because QSEHRAs were brand new at the beginning of 2017, the IRS extended the period for an employer to furnish an initial written notice to its eligible employees until no earlier than 90-days after the IRS issues guidance with respect to the contents of such a notice (Notice 2017-20, I.R.B. 2017-11, 1010). Employers that furnished the written notice were permitted to determine the contents of the written notice using a reasonable good faith interpretation of the Cures Act.
The new guidance provides requirements and sample language for the notice. Under the guidance, 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. The applicable penalties apply to any employer that does not furnish the initial written notice by that date. Thus, an employer that provided a QSEHRA before the release of this notice and has not previously furnished the written notice must furnish the written notice by February 19, 2018.
For some employees, the information in the notice will be necessary to complete their individual tax returns even if the information is not available when they are making decisions about health coverage, and the information will alert them to potential tax consequences. In addition, employers are encouraged to provide employees with information regarding the QSEHRA as soon as possible to allow employees to make informed decisions about health coverage, even if that information is less than the full notice required to satisfy the written notice requirement that will be provided at a later date.
Trump’s Executive Order. President Trump’s Executive Order 13813 directed the Secretaries of the Treasury, Labor, and Health and Human Services to consider revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of health reimbursement arrangements (HRAs), expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with non-group coverage. The IRS considers the guidance to address these objectives. However, this guidance does not alter the basic rule of Notice 2013-54 against group premium reimbursement plans. The Treasury and IRS anticipate that the Departments will issue additional guidance in the future in response to Executive Order 13813.
Comments requested. The Treasury and IRS request comments on the guidance provided in this notice. Public comments should be submitted no later than January 19, 2018. Comments should include a reference to Notice 2017-67. Send submissions to CC:PA:LPD:PR (Notice 2017-67), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be hand delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (Notice 2017-67), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, D.C. 20044, or sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include "Notice 2017-67" in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.
