Qualified Employer Health Reimbursement Arrangement

<div class="Section1">The 21st Century Cures Act introduced a new health reimbursement arrangement (HRA) that allows small employers to continue to reimburse employees for the cost of individual health insurance premiums. Small business employers are able to offer qualified small employer health reimbursement arrangements (QSEHRAs) beginning in 2017 without incurring ACA penalties. 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 using an HRA if the small employer does not also offer its employees group health coverage.</div><br /> The employer can contribute a maximum of $6,350 in 2025 ($6,150 for 2024, $5,850 for 2023 and $5,450 for 2022) for employees who purchase individual coverage, and a maximum of $12,800 for 2025 ($12,450 for 2024, $11,800 in 2023 and $11,050 for 2022).<a href="#_ftn1" name="_ftnref1">¹</a> if the employee purchases family coverage (both contribution limits are indexed for inflation and pro-rated amounts are used for years in which only partial coverage is offered).<br /> <div class="Section1"><br /> <br /> QSEHRAs must generally be offered on the same basis to all comparable employees, though the employer 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. Small business employers who choose to offer QSEHRAs must provide a written notice to employees 90 days before the beginning of the year (the IRS extended the notice deadline for 2017 QSEHRAs<a href="#_ftn2" name="_ftnref2">²</a>) that specifies the amount of the benefit that will be provided by the QSEHRA and informs participating employees that they must inform the health insurance exchanges of the benefit provided by the QSEHRA if the employee intends to apply for premium assistance.<br /> <br /> The notice must also clearly inform the employee that if he or she does not purchase health insurance, ACA penalties may apply and any reimbursements from the QSEHRA may be included in gross income. Small employers must report the QSEHRA coverage on Form W-2, Box 12 (for informational purposes). Further, the employer must provide participating employees with Form 1095-B, and send the same data to the IRS on Form 1094-B.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-34, Rev. Proc. 2023-34.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Notice 2017-20.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  21st Century Cures Act, HR 34.<br /> <br /> </div>

<p> If a qualified small employer HRA (QSEHRA) fails to satisfy the requirements discussed in Q <a href="javascript:void(0)"></a> to Q <a href="javascript:void(0)"></a>, the arrangement will be treated as a group health plan that is subject to Chapter 100. As such, any violation becomes subject to a $100 penalty per affected person per day.<a href="#_ftn1">¹</a></p><p> For example, a QSEHRA can fail to satisfy the requirements if it is not provided by an eligible employer, if it is not provided to all eligible employees on the same terms, if it reimburses medical expenses without first requiring proof that the individual has minimum essential coverage or if it provides benefits that exceed the annual contribution limit. Failure to provide the required notices does not cause the QSEHRA to fail to be a QSEHRA, but instead triggers application of the penalty discussed in Q <a href="javascript:void(0)"></a>. </p><p> Failing to satisfy the QSEHRA requirements does not cause reimbursements for properly substantiated medical expenses to be included in the employee's income, but if the arrangement is actually designed to reimburse non-medical expenses (even if in addition to medical expense reimbursement), all reimbursements will be included in the employee's income. </p><p> Essentially, all QSEHRA reimbursements will be included in employee income if any of the following are true: (1) the QSEHRA reimburses medical expenses without proper substantiation, (2) the QSEHRA reimburses medical expenses in advance of receiving substantiation or (3) the QSEHRA reimburses non-medical expenses. </p><p><hr align="left" size="1" width="33%"></p><p><a href="#_ftnref1">1</a>. IRC § 4980D. </p>

<p> Generally, an individual with a high deductible health plan (HDHP) and no other disqualifying health coverage is eligible to contribute to a health savings account (HSA).<a href="#_ftn1">¹</a> If an employee is provided a qualifying small employer HRA (QSEHRA) that reimburses any medical expense, including any cost sharing required by the employee's health insurance, he or she is disqualified from also contributing to an HSA. </p><p> However, if the QSEHRA may only reimburse premium costs, the employee may also contribute to an HSA. Further, the QSEHRA may reimburse for expenses that qualify as permitted insurance or disregarded coverage under IRC Section 223(c) without jeopardizing HSA eligibility. </p><p> When an employer terminates a group health plan that it had provided in favor of providing employees QSEHRAs, the employee can take into account any unreimbursed medical expenses incurred by the employee when covered by the group health plan if he or she later decides to purchase a HDHP (i.e., for purposes of the HDHP deductible).<a href="#_ftn2">²</a></p><p><hr align="left" size="1" width="33%"></p><p><a href="#_ftnref1">1</a>. IRC §§ 223(c)(3), 223(c)(1)(B). </p><p><a href="#_ftnref2">2</a>. Notice 2017-67. </p>

Generally, an employee is eligible for a premium tax credit if he or she (1) is enrolled in a qualified plan through the health insurance marketplace and (2) is not eligible for employer-provided coverage that constitutes minimum essential coverage that is affordable and provides minimum value. The coverage is considered affordable if the employee contribution is less than 9.5 percent (the base amount is adjusted for inflation, to 10.22% in 2027, 9.96% in 2026, 9.02% in 2025, 8.39% in 2024, 9.12 percent in 2023, 9.61 percent in 2022 and 9.83 percent in 2021) of their household income. Once this is satisfied, the taxpayer is only eligible for the premium tax credit during "coverage months."

<p> An employer must generally report the amount of an employee's permitted benefits under a qualified small employer HRA (QSEHRA) on the employee's Form W-2 in box 12 (regardless of the payments or reimbursements that the employee actually receives from the QSEHRA).<a href="#_ftn1">¹</a> If the amount of the employee's permitted benefit varies based on the number of family members the QSEHRA covers and the employee provides no proof of minimum essential coverage (MEC), the employer must report the highest permitted benefit that would be possible under the QSEHRA. If the employee later provides proof of MEC that shows he or she was eligible for only a lesser benefit, the employer must report this lesser benefit on Form W-2. </p><p> If the QSEHRA has a non-calendar year plan year, the pro-rated amount for the calendar year (rather than the plan year) is reported. If the QSEHRA allows the employee to carry forward amounts from prior years, those amounts are not reported in the subsequent year. If the employee is provided with a QSEHRA for self-only coverage for part of the year, and family coverage for another part of the year, the amount reported must be pro-rated to reflect the change in coverage. </p><p> In situations where an employee received a QSEHRA reimbursement that was taxable because it was found that he or she failed to have MEC for the period in question, the taxable amount is included with the employee's compensation when reporting on Form W-2. Those taxable amounts, however, are excluded from FICA and FUTA taxes, as well as for withholding purposes.<a href="#_ftn2">²</a> However, if the reimbursement is taxable because the employee used the funds to purchase over-the-counter drugs without a prescription or premiums that were paid on a pre-tax basis for group health plan coverage sponsored by the employee's spouse's employer, those amounts are included for FICA, FUTA and withholding purposes. In any event, the permitted benefit reported in box 12 will be the same as it would have been without the failure to maintain MEC and regardless of how the employee used the funds. </p><p> A corrected Form W-2c is required if the employer discovers the failure to maintain MEC after the original W-2 was filed. </p><p> The employer is not required to complete Form 1095-B.<a href="#_ftn3">³</a></p><p><hr align="left" size="1" width="33%"></p><p><a href="#_ftnref1">1</a>. IRC § 6051(a)(15). </p><p><a href="#_ftnref2">2</a>. IRC § 3401(a)(20). </p><p><a href="#_ftnref3">3</a>. Notice 2017-67. </p>

<p> Yes. Eligible employers are permitted to allow QSEHRA participants to pay the remainder of a health insurance policy cost (beyond that which is covered by the QSEHRA) via an after-tax payroll deduction. </p><p><hr></p><p><strong>Planning Point:</strong> While allowing an after-tax payroll deduction as a means for covering the remainder of any health insurance policy premium cost is technically permitted, employers must be careful to ensure that they are not endorsing any particular health insurance policy or carrier (in order to avoid the conclusion that the employer is sponsoring a group health plan). </p><p><hr></p><p> Self-employed individuals are not allowed a deduction for any month in which a family member is provided a QSEHRA that would pay or reimburse premiums or medical expenses of the self-employed individual. </p>

<p> While cash outs are not permitted, the QSEHRA may impose a "run out" period following the actual coverage period where the employee is permitted to submit claims for expenses incurred during the coverage period. <br></p>

<p> QSEHRAs are permitted to make reimbursements available ratably, on a month-by-month basis, rather than making the full amount of the QSEHRA benefit available at the beginning of the year. </p><blockquote><em>Example: </em>Employer provides a QSEHRA with an annual permitted benefit of $3,000 and provides that $250 of that benefit will be available as each month of the year elapses. Employee submits substantiation for $4,000 in qualified medical expenses in January.&nbsp;The QSEHRA may provide that the employee will receive $250 in reimbursements for the claim each month. </blockquote><br> QSEHRAs are not permitted to impose deductible or other cost-sharing requirements before reimbursements become available. QSEHRAs also may not reimburse employees for expenses incurred before the employer provides the employee with the QSEHRA (for this purpose, medical expenses are considered incurred when the care is received, not when the medical bill is paid). However, premium expenses may be treated as though they were incurred (a) on the first day of each month of coverage, on a pro-rata basis, (b) on the first day of the period of coverage or (c) on the date the premium is paid. </p>

<p> Permissible reimbursements do include reimbursement for an eligible employee's family member's health coverage even if the family member's coverage is separate from the health insurance policy that covers the employee. Further, the QSEHRA may reimburse for group health coverage sponsored by the employee's spouse, but the reimbursement is taxable to the extent that the spouse's share of the premiums was paid on a pre-tax basis. </p><p> With respect to newly eligible employees, QSEHRA reimbursements may be made as soon as the employee becomes eligible, assuming the employee has satisfied all additional requirements (for example, substantiation) for receiving the reimbursement. </p><p> Unlike certain other types of accounts, QSEHRAs are permitted to reimburse employees for over-the-counter drugs purchased without a prescription without jeopardizing qualification, but these reimbursements are taxable because IRC Section 106(f) only permits them to be excluded if a prescription is obtained. </p>

<p> Generally, permissible reimbursements from a qualified small employer health reimbursement arrangement (QSEHRA) are excluded from the employee's gross income. However, if all QSEHRA funds are not used by year-end, the employer is not permitted to reimburse the employee with a taxable payment of unused benefits at the end of the year (i.e., a "cash out" is not permitted). If the employer cashes out employees, all payments to all eligible employees under the QSEHRA for the year are included in income and wages. <br></p>