Recent Legislation Offers Small Employers a New HRA Option
A health reimbursement arrangement (HRA) is a funding arrangement under which employers fund health care expenses for their employees on a pre-tax basis. Prior to the Affordable Care Act (ACA), HRAs were popular among small employers as a cheap and flexible option to provide health care benefits to employees.
However, after passage of the ACA, the IRS and the Department of Health and Human Services determined that HRAs were a form of group health plan and subject to the ACA’s market reforms, such as the ban on annual or lifetime dollar limits on essential health benefits and the requirement to provide preventive care services without cost sharing. This determination effectively prohibited stand-alone HRAs that were not integrated with other group health coverage. Since HRAs cannot be integrated with individual health coverage, this also prohibited employers from providing money for employees to purchase their own health insurance on the open market.
The agencies also provided a transition period (originally through 2014, then extended through the end of 2016) during which small employers who had offered HRAs wouldn’t be hit with penalties. During this transition period, as long as the employer sponsoring the plan was not an “applicable large employer” under the ACA, the employer would not be subject to tax penalties for sponsoring a stand-alone HRA.
Qualified Small Employer Health Reimbursement Arrangements
The 21st Century Cures Act, signed into law by President Obama on December 13, 2016, effectively made the transition period rule permanent by excepting a new type of HRA, called a “qualified small employer health reimbursement arrangement” (QSEHRA), from the definition of a “group health plan” under the ACA. An employer is eligible to offer a QSEHRA if (1) it is not an applicable large employer under the ACA, and (2) it does not offer another group health plan to any of its employees. Employees may use QSEHRA funds to pay for qualified out-of-pocket medical expenses and for individual health insurance premiums, including for plans purchased on the ACA’s health care exchanges. QSEHRA reimbursements are limited to $4,950 for individuals and $10,000 for plans provided for family members.
If an employer offers a QSEHRA to any of its employees, it must offer the QSEHRA to all full-time employees other than those who have not yet completed 90 days of service, are under 25 years of age, or who are covered by a collective bargaining agreement. The employer must generally make the same QSEHRA contributions for all eligible employees, but may vary contributions based on the price of an insurance policy in the relevant individual health insurance market, which in turn can be based on the age of the employee and eligible family members, or the number of family members covered. For instance, the employer may offer to cover a set percentage of the cost of each employee’s individual or family insurance policy, which would result in a different dollar contribution for each employee.
The QSEHRA rules are effective for plan years beginning after December 31, 2016. If an employer wants to implement a QSEHRA, it must give written notice to employees 90 days before the beginning of each plan year, or, if the employee is not eligible to participate on the first day of the plan year, as soon as the employee is first eligible to participate. For 2017, the notice requirement is treated as satisfied if the employer provides the notice by March 13, 2017. The notice must include the employee’s permitted benefit for the year, as well as statements regarding an employee’s obligations related to advance payments of the premium tax credit and minimum essential coverage.
QSEHRAs give small businesses more flexibility to provide health benefits for their employees in a tax-advantaged way, using both the group market and the individual market. Rather than choosing between providing full health coverage and providing no health coverage, small employers also now have the option to provide employees with a contribution toward the cost of individual market coverage. This could be an attractive option for small employers with older or sicker employees, for whom insurance coverage is more expensive.
However, small employers should carefully consider whether it makes sense to offer a QSEHRA to employees. Employees who are eligible for tax credits on the ACA’s health care exchanges may lose eligibility for those tax credits if their employer funds a QSEHRA for them (although the employer is only obligated to offer the QSEHRA on equal terms to all employees, and any employee may decline). Therefore, lower-income workers may not take advantage of the QSEHRA offer, and it may largely benefit higher-income workers, who are ineligible for tax credits on the exchanges.
 An applicable large employer is defined by the ACA as an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year. Applicable large employers are subject to the ACA’s employer mandate.
 Applicable large employers must still offer their workers the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan.