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Cures Act Allows for Small-Employer HRAs

It’s too soon to determine the final contours of the GOP’s “repeal and replace” of the Affordable Care Act (“ACA”). However, before leaving DC for the winter holidays, Congress and President Obama did agree on a provision granting small employers a bit of relief from this statute. Tucked at the very end of the 21st Century Cures Act is a provision allowing certain small employers to offer their employees a health reimbursement arrangement (“HRA”) that need not be “integrated” with a group health plan. Employees may then use their employer’s pre-tax contributions to such an HRA to pay premiums under individual health insurance policies.

As explained in our February 19, 2015, article, the agencies charged with administering the ACA view HRAs as a type of “employer group health plan.” And standing alone, an HRA would fail to comply with certain ACA mandates. For that reason, the agencies long ago announced that an HRA would be impermissible unless “integrated” with a more comprehensive employer plan (or subject to certain other limited exceptions). This announcement upset a long-standing practice by many small employers (who were too small to purchase group coverage for their employees) of offering premium subsidies for their employees’ purchase of individual policies.

Recognizing this disruption, the IRS granted limited transition relief to small-employer HRAs. But Notice 2015-17 extended this relief only through June 30, 2015. For the last 18 months, even such small-employer HRAs have been proscribed by the ACA (potentially subjecting an HRA’s sponsor to an excise tax of $100 per day per affected employee).

Reflecting bipartisan agreement that this result was good for neither employers nor their employees, the Cures Act creates a new type of health plan – called a “Qualified Small Employer Health Reimbursement Arrangement” (or “QSEHRA”). Qualifying employers may establish a QSEHRA, fund it within certain limits, and still avoid the ACA excise taxes. And their employees may use the employer’s contributions to pay individual health insurance premiums. Employers should understand, however, that this new vehicle comes with a raft of restrictions.

For instance, in order to establish a QSEHRA, an employer must not be an “applicable large employer” under the ACA’s employer shared responsibility (or “play-or-pay”) rules. This means that the employer (including all members of the employer’s controlled group) must have fewer than 50 full-time employees, including full-time equivalents. Moreover, the employer may not sponsor any group health plan that constitutes “minimum essential coverage” (or “MEC”) under the ACA’s broad definition of that term.

The QSEHRA, itself, must also meet several requirements, including the following:

  • All contributions must be made by the employer. Not even pre-tax employee contributions are allowed.
  • Essentially all employees must be covered. The limited exceptions apply to new hires (those with fewer than 90 days of service), part-time and seasonal employees, members of collective bargaining units, employees under age 25, and non-resident aliens.
  • The employer’s contribution on behalf of each employee must also be uniform, subject only to adjustments for an employee’s age and the number (and ages) of any covered dependents.
  • There is also a dollar cap on annual contributions. For 2017, the cap is $4,950 if only employees are covered, or $10,000 if the QSEHRA also covers dependents. These caps must be pro-rated for any partial year of coverage, and will be adjusted for inflation in future years.
  • Annually, the sponsoring employer must provide a written notice to each covered employee that explains certain of the rules applicable to QSEHRAs (as outlined below). This notice must be provided at least 90 days before the start of the calendar year for which a QSEHRA contribution will be made (or, if later, when an employee first becomes eligible under the arrangement). For calendar-year 2017, this notification deadline is extended to 90 days after the law was enacted (which was December 13, 2016). The statute specifies a penalty of $50 per employee (capped at $2,500 per year) for failing to provide this notice.
  • The amount contributed to an employee’s QSEHRA must also be reported on the employee’s Form W-2. This reporting requirement will first apply for 2017 (i.e., on W-2’s to be issued in early 2018).

The one bit of good news involves COBRA. Those coverage continuation rules will not apply to QSEHRAs.

Although many employees will no doubt be glad to receive this sort of help in paying their individual health insurance premiums, they should understand that participation in a QSEHRA may also have certain drawbacks. For instance,

  • The QSEHRA, itself, will not constitute MEC. So it will not shield an employee from the tax penalty associated with the ACA’s individual mandate.
  • And unless an employee does have MEC (through an individual insurance policy), an employer’s contributions to the employee’s QSEHRA will be taxable.
  • Because a QSEHRA does not constitute MEC, a QSEHRA participant may still qualify for a federal tax subsidy to purchase coverage through an Exchange. However, the amount contributed to the QSEHRA will offset, on a dollar-for-dollar basis, any tax subsidy the employee would otherwise receive. So in effect, the employer would be shouldering a cost that would otherwise be borne by the taxpayers.
  • And a QSEHRA contribution could entirely disqualify an employee from receiving a federal tax subsidy. This is because that contribution must be taken into account when determining whether the cost of employee-only coverage under the second-lowest-cost “silver” policy available on the Exchange in the employee’s home state exceeds 9.5% of the employee’s household income.

These QSEHRA rules are generally effective as of January 1, 2017. However, the Cures Act extends the transition relief granted by the IRS in Notice 2015-17 through the end of 2016. So any small employer that complied with those rules should not face any excise tax for the period before these new rules take effect (and need not have complied with all of the requirements applicable to QSEHRAs).

Given the host of requirements applicable to QSEHRAs, as well as the adverse consequences of noncompliance – for both employers and their employees – any employer seeking to rely on these rules should have a written plan document outlining the various requirements. Such a document will not only facilitate the employer’s compliance, but should also stand the employer in good stead in the event of an IRS audit.