On Oct. 31, 2017, the IRS issued guidance related to qualified small employer health reimbursement arrangements (QSEHRAs), which were created by the 21st Century Cures Act in December 2016. As a reminder, small employers with fewer than 50 full-time equivalent employees who are not subject to the employer mandate may implement a QSEHRA. A QSEHRA is 100 percent employer funded and is generally the only way that a small employer may reimburse or pay the cost of an individual policy for an employee.
To be eligible, the employer must not sponsor a group health plan to any employees. The new guidance, issued in IRS Notice 2017-67, clarifies that “group health plan” includes dental, vision and health FSA coverage. However, an employer may sponsor a retiree health plan and not affect its eligibility to provide a QSEHRA for active employees. In addition, if one employer member of a controlled group sponsors a group health plan for employees, all employer members are ineligible to provide a QSEHRA. However, an employer may sponsor a retiree health plan without impacting its eligibility to provide a QSEHRA for active employees.
A participant cannot waive QSEHRA coverage. The QSEHRA cannot provide reimbursement unless the participant provides proof of minimum essential coverage or provides an attestation thereof. The guidance includes a sample attestation.
Expenses must be substantiated prior to reimbursement. The rules regarding reimbursement of a mistaken or unsubstantiated expense are quite severe. If the participant doesn’t reimburse the QSEHRA for the expense (by the following March 15), the plan essentially is disqualified, with all subsequent reimbursements being treated as taxable earnings.
The employer must provide a notice to each existing eligible employee 90 days prior to the beginning of the plan year or the first day on which a new employee is eligible to participate. Failure to comply with the notice requirement could result in a penalty equal to $50 per employee (maximum $2,500 per year). There is transition relief available for the 2017 and 2018 plan years as long as the notice is distributed by Feb. 19, 2018, or 90 days before the first day of the plan year, whichever is later. The notice may be distributed electronically in compliance with the DOL’s electronic disclosure rules. Sample language is provided in the guidance.
A QSEHRA is not subject to Section 6055 Reporting (Form 1095-B), but it is subject to PCOR reporting and payment.
The IRS intends to formalize this guidance in proposed regulations, followed by a comment period and eventually final regulations. Until then, QSEHRA’s may rely upon Notice 2017-67.
IRS Notice 2017-67 »