Health Reimbursement Accounts- What is it and how does it work? Is it a good option for small business owners?
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
September 2018
Effective January 1, 2017, small employers not offering group healthcare benefits can implement an alternative, employer-sponsored program through a QSEHRA. The QSEHRA may provide, among other things, and on a tax-preferred basis, for (i) reimbursement of health insurance premiums or (ii) payment of expenses for medical care incurred by eligible employees or their family members. Though now entering its third year of availability, mainstream coverage of and discussion about the QSEHRA has seemed minimal. This summary seeks to explain the basics of the program, with a particular view toward how it can benefit West Georgia’s small-business owners.
Employer Eligibility:
Small businesses are eligible for QSEHRA if they (a) employed fewer than 50 full-time employees (including equivalents) in the previous calendar year, and (b) do not maintain any group “health” plans covering its employees. The term group “health” plan does include dental, vision, or any other group voluntary products that are part of the Section 125 cafeteria plans. So, an employer cannot provide a QSEHRA with one of these plans. Further, if any employer in the same controlled group of companies (subsidiaries, parents, and the like) offers a group health plan to its employees, the employer cannot provide a QSEHRA.
Employee Eligibility:
An employer electing to use a QSEHRA reimbursement plan must provide it on the same terms to all full-time eligible employees. Note, however, that certain employee classes may be excluded (examples include part-time or seasonal employees, union employees, non-resident aliens with no U.S. income, and employees under the age of 25). Employees deemed eligible cannot be allowed to waive coverage, though it is the employee’s responsibility to request qualified reimbursements from their employer’s established QSEHRA plan. Small-business owners themselves may participate in the plan provided that they are also an employee of the business for income tax purposes. We recommend consulting your licensed tax professional when determining an owner’s eligibility, as corporate structure, which is sometimes complex, affects eligibility.
Plan Requirements and Limitations:
The employer is solely responsible under a QSEHRA plan for funding the reimbursement program. Employees are not permitted to contribute to the plan, via salary reduction or otherwise (such employee contributions are permitted, for example, under a Flexible Spending Account (FSA). For 2018, employers may reimburse up to $5,050 for a self-only employee and $10,250 for employees with a family. The IRS typically issues the monetary limits for each tax year in October of the preceding year.
QSEHRA payments or reimbursements must be limited to Code Section 213(d) medical care expenses incurred by the employee or the employee’s eligible dependents after the employee provides proof of coverage of minimum essential coverage (MEC). Reimbursement-eligible expenses include, for example, health insurance premiums most out-of-pocket medical expenses. Out-of-pocket medical expenses reimbursed from another source (like an employee’s spouse’s health reimbursement plan) are not eligible for reimbursement.
An employer funding a QSEHRA for any tax year must provide a written notice thereof to each eligible employee, which notice must be provided not later than 90 days before the beginning of the year. Employees who become eligible to participate in the QSEHRA during the year must receive this notice before the date on which the employee becomes eligible to participate (taking into account any applicable waiting periods, etc.). Failure to provide this notice could result in a penalty of $50 per employee for each failure (maximum annual penalty of $2,500). The notice must include:
* a statement of the employee’s maximum benefit under the program for the year;
* a statement that, if the employee is applying for advance payment of the premium assistance tax credit, the employee should provide the exchange/marketplace with information about the QSEHRA’s maximum benefit; and
* a statement that, if the employee is not covered under MEC for any month, the employee may be subject to a penalty under the ACA’s individual mandate, in which case reimbursements under the QSEHRA may be includible in gross income.
Insurance Premium Reimbursement Guidelines:
Marketplace Premium Tax Credits
There are very limited options, which vary by county, for purchasing individual insurance plans in Georgia. Employees qualifying for a premium tax credit (PTC) through the healthcare.gov marketplace must report their QSEHRA allowance. The QSEHRA may render certain employees ineligible for a PTC, or may otherwise reduce the PTC (dollar-for-dollar) to which they may have otherwise been entitled. If the QSEHRA is not affordable coverage, the PTC will be allowed, but reduced by the amount of the permitted benefit.
Healthcare Sharing Ministries
Employees who have opted out of traditional insurance coverage, and who participate in health shares (such as Medi-Share) may have eligible expenses reimbursed through their HRA allowance; provided, however, that because these plan types do not qualify as MEC plans, all reimbursements received are taxable. Membership fees associated with the health share plans are not reimbursable.
Spousal Coverage Through an Employer
An advantage of establishing an employer-sponsored group health plan is the pre-tax cost-share allowed through a Section 125 cafeteria plan. If an employee is enrolled in coverage through his or her spouse’s workplace, the QSEHRA reimbursement is allowed for those premiums. If your spouse is paying for those premiums on a pre-tax basis, then the HRA reimbursement is considered taxable.
In Conclusion:
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