December 28, 2016

Qualified Small Employer HRAs

On December 13, 2016, President Obama signed the 21st Century Cures Act, allowing qualified small employers to offer Health Reimbursement Arrangements (HRA) that follow certain terms.

After the Affordable Care Act was passed, the IRS originally determined that an HRA was not a qualified group health plan. The Cures Act overrules this decision. HRAs are again an option for qualifying small employers.

To be eligible, the small employer must have fewer than 50 employees and must not offer a group health plan to any of its employees.

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) must be subject to the following terms.
  • No salary reduction contributions may be made (i.e., 100% employer-funded).
  • Employer must receive proof of employee’s minimum essential coverage.
  • Reimbursements must be for qualifying medical expenses.
  • Reimbursements for any year cannot exceed $4,950 (or $10,000 for family coverage), which will be adjusted annually for inflation.
  • Employer must offer the same terms to all eligible employees.
  • Employees receiving a monthly premium assistance credit (under Code Sec. 36B) are not eligible employees.
  • Employer must follow additional requirements as outlined in the Act, if applicable.
Beginning with the 2017 calendar year, the employer will report (in January 2018) the benefit amount of the QSEHRA on employees’ Forms W-2. The IRS will likely issue additional guidance in the coming months.

When an employer provides a monthly QSEHRA, the employee is not eligible for the premium assistance tax credit because this would be “double-dipping” tax-free benefits. Despite this limitation, there are many employers who can use the QSEHRA as a tax-free medical benefit.

The complete (and very wordy) 21st Century Cures Act can be found here. Section 18001 of the Act discusses the QSEHRA.

2 comments:

  1. Thank you for this information. As you said, the law is very wordy. One thing I am uncertain about: if a church was going to include in Salary on the W-2 the extra portion given to cover health expenses, is this still applicable for 2016? It is not clear to me if that would be taxable or not any more for 2016, given their statement for retroactively reducing the tax burden. Thank you!

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  2. This is an another example of a conundrum created by the stop and start implementation of the ACC. This requires each ministry to carefully consider its unique circumstances and seek professional help if necessary.

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