Written by: Elsa Fortune, CPA
On October 12, 2017, an executive order on health reimbursement arrangement (HRAs) was executed by President Trump directing the Treasury and other federal agencies to consider revising guidance, to the extent permitted by law, to increase the usability of HRAs, expand employers' ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with non-group coverage.
The latest notice provides guidance on three items
- The requirements for providing a qualified small employer health reimbursement arrangement (QSEHRA) under IRC 9831(d) which provides that a QSEHRA will not be treated as a group health plan
- The tax consequences of the arrangement
- The requirements for providing written notice of the arrangement to eligible employees.
A QSEHRA is a qualified small employer health reimbursement arrangement that is funded solely by an eligible employer, generally an employer who has fewer than 50 full time employees and who does not offer a group health plan. The QSEHRA does not allow any salary reduction contributions. Eligible full time employees get reimbursed for insurance premiums and medical expenses incurred for themselves and/or their family members, in accordance with the terms of the employers arrangement after the employee provides proof of Minimal Essential Coverage (MEC).
Employers can decide to offer any percentage of reimbursements under the same terms requirement for all eligible employees up to the statutory limits. The amount of reimbursements cannot exceed the statutory limits of $4,950 for individuals and $10,000 for family coverage for 2017 and $5,050 and $10,250 respectively for 2018. This arrangement does allow carryovers but they are subject to limits for that year of the carryover.
The tax consequences of the arrangement are minimal. Generally, The QSEHRA reimbursements are not included in the employee’s gross income if the employee has the minimum essential coverage (MEC). If an employee does not have MEC, he/she may be liable for a shared responsibility payment and some reimbursements will be taxable and includible in gross income. The permitted benefit must be reported on Form W-2 by the employer. We can assist you with the preparation and accurate reporting needed on the W-2. Employers are not required to file Form 1095-B for Health coverage when providing a QSEHRA.
Written notice of the arrangement must be provided to eligible employees. An eligible employer that provides QSEHRA during 2017 or 2018 must comply with the written notice requirement on the date on which an employee becomes eligible or at least 90 days before the beginning of each year being funded.
The notice requires 3 statements:
- A statement of the amount which is the permitted benefit under the arrangement for eligible employees for the year.
- A statement that the eligible employee must provide permitted benefit amount to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit (PTC)
- A statement that if the eligible employee is not covered under MEC for any month, he/she may be subject to tax for that month and reimbursements may be includible in gross income.
An employer that has not yet furnished the written notice must furnish the written notice by February 19th, 2018. Failure to timely provide written notice results in a penalty; it does not cause the QSEHRA to fail.
The guidance in this notice applies to plan years beginning on or after November 20th, 2017.