Employee Benefits: Small Businesses Can Offer Standalone HRA for Employees
Small employers may now offer their employees a pre-tax benefit to help pay for health insurance premiums – without also offering an employer-sponsored health plan. Better yet, in recent additional guidance, IRS has extended the deadline for employer compliance with a key provision of this new benefit option. As a result, eligible employers can still offer this new arrangement to their employees in 2017.
The 21st Century Cures Act, signed into law in the last days of the Obama administration on December 13, 2016, now permits certain small employers to sponsor stand-alone HRAs to eligible employees, to help defray health benefit costs. An eligible small employer cannot offer its own group coverage –these are employers who are not mandated by the ACA to offer coverage to employees. However, these new HRAs - “Qualified Small Employer Health Reimbursement Arrangements” - can cover the cost of premiums for an employee’s coverage obtained elsewhere, for example on the Exchange or through a spouse’s employer.
As originally implemented, the law required adopting employers to provide an initial notice to employees by March 13, 2017. Recently, though, the IRS issued Notice 2017-20 that extended the original deadline until further clarifying guidance is published.
An employer that has already implemented this new option can rely on a good faith interpretation of the law’s notice requirements.
What is a QSEHRA?
A Qualified Small Employer Health Reimbursement Arrangement or QSEHRA, is a new version of Health Reimbursement Arrangement. HRAs are not new; HRAs are accounts funded by employers - at employer-determined levels - for employees, to allocate pre-tax dollars to employees to pay for certain medical expenses.
Employers offer an HRA in tandem with a group health plan to provide employees a buffer against rising health costs. HRA allocations may be used to pay for deductibles under the employer-sponsored plan, for example.
After the passage of the Affordable Care Act in 2010, and the establishment of the Exchanges, small employers – those who are not subject to the ACA’s employer shared responsibility provision – considered an alternative to offering expensive group health plans to employees. Instead, these employers considered offering a stand-alone HRA - with no tandem group health plan - that could fund employees’ premium payments for individual coverage on the Exchange. By applying this strategy, employer costs could be capped and employees could obtain desired coverage.
IRS guidance, however, stated otherwise. Under the ACA, said IRS, stand-alone HRAs are considered “group health plans” and so were required to satisfy the same rules as other group plans. This includes an unlimited annual coverage amount, for example. An HRA is, by definition, limited to the maximum contribution set by the employer. As a result, the IRS guidance required employers who offered an HRA to also offer a group health plan along with the HRA. Otherwise, if an employer offered a stand-alone HRA, then the employer would be subject to a $100/day penalty under ACA rules. This line of thought shut the door on stand-alone HRAs.
Under the new law, a QSEHRA is specifically NOT offered together with a health plan. In fact, it must be the only health insurance benefit offered by the employer. This works because the new law expressly excludes the QSEHRA from the ACA’s definition of a “group health plan.” Further, a QSEHRA is specifically not subject to COBRA continuation rules.
Who can offer a QSEHRA?
Only employees who are not “applicable large employers” under the ACA can offer this benefit. Employers with fewer than 50 full-time employees or full-time equivalents are eligible to offer a QSEHRA. Further, an employer that decides to offer a QSEHRA cannot offer any group health coverage. This may lead to a difficult decision for employers who now cover management, say, but not rank and file employees.
An employer can exclude certain employees – those under 25 years old, for example, or part-time or seasonal employees. However, a compliant QSEHRA must otherwise be offered on the same terms to all eligible employees.
Who can benefit from a QSEHRA?
Employees who are enrolled in an acceptable level of health coverage (“minimal essential coverage” under the ACA) are eligible. For example, an employee who is covered under an Exchange plan, or an employee who is covered by a spouse’s plan, can benefit from his employer’s QSEHRA.
How much is the QSEHRA benefit?
The law limits the amount of a QSEHRA benefit to $4,950 per employee in a given year (with a $10,000 maximum for an employee with family coverage). Like any HRA, the benefit maximum under a QSEHRA is available for payment; an employee is not automatically given the QSEHRA amount at the start of a plan year. Rather, an employer commits to pay up to that amount.
What does an employer need to do to offer a QSEHRA?
Like any other employer-sponsored health plan, a QSEHRA must be in a written plan format. An employer must provide a specified notice to employees about this benefit. In future years, this notice must be distributed at least 90 days before the start of the QSEHRA’s plan year. For a new employee, the notice must be given when the employee is first eligible.
For 2017, however, the deadline for the employer notice is open-ended as a result of the IRS’ Notice 2017-20.
What does an employee need to do to benefit from a QSEHRA?
An employee must provide proof of health care coverage to his or her employer. This “proof” is not spelled out in the law, so employers will need to work with their advisors to set the terms of that requirement. It appears that the availability of a QSEHRA does not trigger a special enrollment period for an employee on the Exchange. Therefore, if an employer rolls out this new option in 2017, it appears that it will only benefit employees who are already enrolled in coverage, whether on the Exchange or otherwise.
Is there any down-side to this new benefit option?
For one thing, the QSEHRA benefit can reduce an employee’s subsidy on the Exchange. Also, as mentioned above, if a company offers employer health coverage to some employees now (management, for example) now, then it cannot offer a QSEHRA. These details require some number-crunching for both an employer and an employee, to decide whether this new benefit is worth adopting.
Perhaps a QSEHRA is not for everyone. Fortunately, employers now have a longer period to consider whether to offer a QSEHRA, since the law’s notice requirement is now on extension.