(Dec. 21, 2016, additional information added in red.)
Both houses of Congress have passed, and the President is expected to sign, the 21st Century Cures Act. (President Obama signed the Act on December 13th.) This massive bill includes a myriad of provisions, but one that might be of interest to small employers (fewer than 50 full-time employees) and their brokers, will allow small employers who do not offer a group health plan to ANY of their employees to offer a “qualifying HRA” that employees can use to pay for medical care expenses including premiums for individual health policies. This has not been allowed under the Affordable Care Act, and the IRS (as well as DOL) has issued various notices and guidance over the past few years, reiterating this prohibition and the penalties on noncomplying employers. The new changes will be effective January 1, 2017.
Changes to HRA Rules
Section 18001 of the 21st Century Cures Act amends IRC section 9831 by adding new subsection (d) on “Qualified Small Employer Health Reimbursement Arrangements” (QSEHRAs). It provides that qualifying HRAs will no longer be considered “group health plans” for purposes of ERISA or the ACA (except for the Cadillac tax, which President-elect Trump pledged to repeal anyway). One ramification of this is that qualifying HRAs will not be subject to the ACA’s insurance market reforms, such as the requirement to pay first-dollar coverage for preventive services, or the prohibition on annual or lifetime dollar limits. What this means is that small employers can offer HRAs on a stand-alone basis to employees, and employees may use funds in qualifying HRAs to buy individual health insurance, either on or off the exchanges. See below for details on how the HRA reimbursement coordinates with the premium tax credits available on the exchanges, and for other important details.
Requirements on “Qualifying HRAs” (QSEHRAs):
- Must be funded solely by employer contributions (i.e., no salary reduction contributions)
- Must be offered to all eligible employees on the same terms
- Some exceptions as to who is eligible (e.g., less than 90 days of service, part-time and seasonal employees, other categories of excepted employees under IRC section 105(h)(3)(B)),
- Amount of reimbursement may vary based on: 1) the price of an individual policy in the geographic area (which is based on the age of the individual and family members) and 2) the number of family members covered under the HRA.
- Maximum annual employer contribution is $4,950 per year for an HRA covering only the employee, and $10,000 for an HRA covering the employee and his/her family
- If an employee is covered for fewer than 12 months, the monthly maximum is 1/12th o f the annual maximum
- There are no statutory minimum amounts, employer has discretion to offer less than the maximum
- Must provide payment or reimbursement for medical care expenses (as defined under Code section 213(d)), which can include premiums for individual health insurance, Medicare Supplemental insurance, and Medicare Parts A, B, C and D. Employee must provide documentation/receipts for medical expenses or health insurance premiums paid.
Coordination of QSEHRA & Exchange Credits
The Cures Act also amends Code section 36B to provide that employees (and their spouses and dependents) will not be eligible for a premium tax credit to buy health insurance in the exchange for any month they are provided a QSEHRA which constitutes “affordable coverage” (as defined). If the QSEHRA provides less than affordable coverage, the 36B credit otherwise available will be reduced by 1/12th of the annual amount the employee can receive under the QSEHRA. (The maximum annual amount is called the “permitted benefit.”)
Affordability is determined separately for each employee. A QSEHRA is considered to provide affordable coverage for a month if, for a particular employee:
- that employee’s premium for self-only coverage under the second lowest cost silver plan offered in the relevant exchange, minus
- 1/12 of that employee’s permitted benefit for the year,
- is not more than 1/12th of 9.5% (indexed) of the employee’s household income for the year.
It appears the exchange or the employee would have to make the calculation, based on the cost of coverage and on the employer’s QSEHRA notice (see below). The employer would NOT have to make this calculation.
Example: The permitted benefit under Generous Employer’s QSEHRA is the $4,950 maximum allowed under the new law for employee-only coverage. This equals $412.50 per month.
- If an employee’s premium for self-only coverage under the second lowest cost silver plan offered in the relevant exchange is $412.50 or less, the employee would not qualify for a subsidy.
- If the premium cost is $512.50, the affordability calculation would be $512.50 – $412.50 = $100. If $100 is not more than 9.69% of the employee’s household income for that month, then the QSEHRA is affordable for that month. This means if the household income is $1,032 or more that month, the QSEHRA is affordable and the employee does not qualify for a tax credit that month.
- For any month in which the QSEHRA coverage is not affordable, the otherwise-available credit will be reduced (but not below zero) by the amount the employee could receive under the QSEHRA for that month. If the premium cost is $612.50, the affordability calculation would be $612.50 – $412.50 = $200. If $200 is more than 9.69% of the employee’s household income for that month, then the QSEHRA is not affordable for that month. If the employee qualifies for a tax credit, it will be reduced by $412.50 for the month.
Additional Important Details on Qualifying HRAs
If an employee uses the QSEHRA funds to purchase insurance which does not provide “minimum essential coverage” or “MEC” (e.g., to buy “excepted benefits” such as a cancer-only policy), the reimbursement amount will be included in the employee’s gross income and may be subject to taxation.
The new law also grants retroactive transition relief from penalties to small employers who continued to reimburse employees for medical expenses (including premiums for individual health insurance) since June 30, 2015. That was the date to which IRS Notice 2015-17 had extended transition relief from the $100/day penalty under IRC section 4980D. This means that small employers who have continued to provide such reimbursements will not be subject to the potential penalties.
Small employers who offer QSEHRAs must provide a written notice to all eligible employees at least 90 days before the beginning of the plan year (or as of the date the employee is eligible, if not eligible as of the first day of the plan year). The notice must tell employees:
- the maximum annual amount available to that employee, and
- if the employee applies to a health insurance exchange for an advance premium tax credit, the employee should tell the exchange what his/her maximum annual amount is, and
- if an employee does not have MEC he/she may be required to pay the individual mandate tax (under IRC section 5000A), and
- any amount the QSEHRA reimburses the employee for the non-MEC coverage may be taxable to him/her.
A small employer who offers a QSEHRA but fails to provide the required notice may be subject to an IRS tax of $50 per affected employee, to a maximum of $2,500 per calendar year; however, this will not apply if the employer shows its failure to provide the notice was due to reasonable cause and not willful neglect.
Additional Provisions in the CURES Act
The bill was passed by the House on November 30th and by the Senate on December 7th and signed by the President on December 13th. The bill include numerous provisions on various areas of medical research and devices, HIPAA privacy and security-related projects for the Department of Health and Human Services (HHS); faster approval process for new medications and medical devices by the Food and Drug Administration (FDA); mental health and substance use disorder; Medicare and Medicaid; and provisions affecting President Obama’s Precision Medicine Initiative and Vice President Biden’s Cancer Moonshot effort ($1.8 billion for cancer research).