Small employers have long struggled to find health care solutions in order to both offer assistance in funding health insurance for employees and comply with the sometimes-onerous Affordable Care Act restrictions. Fortunately, one final law has been passed to make it easier for small employers to reimburse employees for health expenses, and will allow qualifying small business clients to offer health reimbursement arrangements (HRAs) without fear of being penalized.
This should now make it much simpler for these clients to offer employees health insurance assistance in an increasingly competitive market. Small business clients will be able to offer qualified small employer health reimbursement arrangements (QSEHRAs) beginning in 2017—if the clearly defined requirements that make the client and HRA eligible are satisfied.
QSEHRA Eligibility and Benefits
Under previously existing rules, an employer was not able to reimburse employees for individual health insurance policies that the employee purchased through the health insurance exchanges without a penalty. While these employers were still permitted to offer qualified group health coverage, many very small employers found it difficult to obtain affordable group coverage and instead looked for alternative solutions to helping employees fund their own health coverage.
The new rules providing for QSEHRAs allow a small employer who is not an applicable large employer under the ACA (i.e., one that has fewer than 50 full-time employees) to reimburse employees for the purchase of individual health insurance policies without risking penalization. In order to be eligible, however, the small employer must not also offer its employees group health coverage.
QSEHRAs are allowed to reimburse employees on a pre-tax basis for both health insurance premiums and other eligible documented medical expenses that are otherwise not reimbursed without the hurdles as to integration with another qualifying group health plan that existed with traditional HRAs under the ACA.
Importantly, the ability to offer a QSEHRA is retroactive, so that small employers will not need to worry about being penalized for HRAs that they offered in past years.
What is a QSEHRA?
A QSEHRA is essentially a standalone HRA offered by a small employer—as with a traditional HRA, only the employer may contribute (salary reduction arrangements are not permitted). Comparable QSEHRAs must be offered to all eligible employees, though employers are permitted to contribute more for employees whose coverage also covers family members. Variations in the amount contributed are also permitted based on the age range in which the employee falls or based on the number of family members that the employee’s insurance covers.
Small business clients can exclude employees who have yet to work 90 days, employees who have not reached age 25, employees who are covered by a collective bargaining agreement and employees who are nonresident aliens and have no earned income from U.S. sources.
The employer can contribute a maximum of $4,950 in 2017 for employees who purchase individual coverage, and a maximum of $10,000 if the employee purchases family coverage (both contribution limits will be indexed for inflation after 2017 and pro-rated amounts are used for years in which only partial coverage is offered).
QSEHRAs are not permitted to reimburse employees for any group coverage, even if the employee’s spouse’s employer provided that group coverage.