Stand-Alone HRAs Allowed for Qualified Small Employers

The enactment of the Affordable Care Act (“ACA”) imposed certain requirements on group health plans.  Under the ACA, group health plans could no longer have annual or lifetime limits and had to provide preventive care coverage for their participants. These requirements were problematic for employer-sponsored health reimbursement arrangements (“HRAs”), including HRAs used to reimburse employees for the cost of the employee’s individual insurance policy.  Because an HRA is a group health plan, it is subject to the ACA group health plan requirements.  By design, an HRA has annual limits and does not reimburse all preventive care expenses for participants.  Therefore, stand-alone HRAs, including those reimbursing individual insurance premiums, are not compliant with the ACA (see IRS Notice 2013-54 and IRS Notice 2015-17).  Because these types of employer payment plans were particularly popular with small employers, employers with less than fifty full-time and full-time equivalent employees were granted transition relief until July 2015 to comply with the ACA requirements.

21^st Century Cures Act.  On December 13, 2016, President Obama signed into law the 21^st Century Cures Act (“Act”). This Act contains a special rule that allows certain small employers to sponsor a stand-alone HRA (referred to as a “qualified small employer health reimbursement arrangements” (“QSEHRA”) to reimburse employees (and their dependents) for their 213(d) medical expenses, including individual health insurance premiums.  This Act amends the ACA’s definition of “group health plan” to exclude QSEHRAs, thereby exempting this type of plan from the ACA requirements that cause HRAs to be non-compliant.  The following is a broad overview of the provisions of the Act related to QSEHRAs.

Caution:  As with many pieces of legislation, there are issues that Congress did not address that likely will need to be addressed by the regulatory agencies (e.g., the IRS) through regulatory and sub-regulatory guidance.  We have heard that the IRS intends to provide guidance quickly, but employers wishing to implement a QSEHRA for January 1, 2017, need to act immediately.  Such employers should obtain the assistance of experienced counsel before proceeding.

 Employers Eligible to Sponsor QSEHRAs.

1. Must be a “small” employer. Only small employers are allowed to sponsor QSEHRAs.  Under this Act, a small employer is defined in accordance with §4980H(c)(2) under which a small employer must have less than fifty (50) full-time and full-time equivalent employees during the prior year, i.e. an employer that is not an applicable large employer (“ALE”).  The analysis of whether an employer constitutes a small employer under this Act is the same analysis as determining whether an employer is an ALE. This determination includes the seasonal worker exception as well as controlled group rules.
2. Employer may not offer a group health plan. The second condition an employer must satisfy to be eligible to sponsor a QSEHRA is that the employer must not be offering another group health plan to any of its employees.

Requirements of QSEHRAs.  If an employer is eligible to sponsor a QSEHRA, the QSEHRA must satisfy specific design requirements.

1. Tax consequence if individual does not have MEC. In order for the reimbursements for eligible expenses to be excluded from the participant’s gross income in accordance with IRS Code §§105 and 106, the individual incurring the expense must be enrolled in minimum essential coverage (“MEC”).  It does not appear that participants are required to have MEC (i.e., the absence of MEC only causes a tax consequence), but there is language in the law that could be interpreted to require participants to have “other coverage” in order to participate.  Guidance from the IRS on this issue would be helpful.
2. Must be for 213(d) medical expenses of the eligible employee or eligible employee’s family. Reimbursements or payments from the QSEHRA must be for eligible medical expenses under IRS Code § 213(d).
3. The QSHRA must be offered on the same terms to all eligible employees. The terms of the QSEHRA must be the same for all eligible employees of the eligible employer.  There is an exception to this requirement: the amount of benefits available under the QSEHRA may vary based on age and family-size to account for variations in the prices of insurance policies in the relevant individual health insurance market.
4. The QSEHRA must be funded solely by an eligible employer. The QSEHRA must be funded solely by the employer.  This means that the QSEHRA cannot by funded by salary reduction contributions, i.e. an employee cannot have his or her salary reduced and the amount of the reduction be contributed to the QSEHRA.
5. Reimbursements cannot exceed annual cap. Reimbursements or payments from the QSEHRA cannot exceed an annual cap (adjusted for inflation) of $4,950 for individuals or $10,000 for families.  In the event that an individual is not covered by the plan for the entire year, the annual cap is prorated to reflect the months that the individual is on the plan.
6. Notice is required. If an eligible employer intends to sponsor a QSEHRA for plan years beginning after December 31, 2016, it must notify eligible individuals in writing at least ninety days prior to offering the QSEHRA.  Because of the timing of the Act, transition relief for this year is available for plans that cannot meet a ninety-day period prior to the start of the plan year. For these plans, they may notify eligible employees within ninety days of the enactment of this Act.

Other Issues.

1. Modification of other laws. The Act amended other portions of the Internal Revenue, ERISA, and the PHSA to remove QSEHRAs from the definition of group health plan.  As a result, a QSEHRA is not, for example, considered a group health plan for purposes of COBRA continuation coverage.
2. Impact on subsidies. Participating in a QSEHRA will have an impact on an individual receiving a tax subsidy for coverage.  If an employee is participating in a QSEHRA for a month and the QSEHRA constitutes affordable coverage (as defined in the Act), the individual will not receive a subsidy for that month.  If, on the other hand, the QSEHRA is not affordable, then the subsidy will be reduced by 1/12 of the maximum annual amount the employee can receive under the QSEHRA.

Next Steps.  Employers should evaluate whether a QSEHRA is available to them and, if so, whether such a plan meets their objectives.  A QSEHRA will be most beneficial to a small employer that currently does not sponsor a group health plan and has a number of employees currently purchasing individual medical insurance policies.  Given the timing of the legislation in relation to the open enrollment periods in the individual market, it may be difficult for a small employer to replace a traditional group health plan with a QSEHRA for 2017.

If you would like to discuss the new law further or need assistance determining eligibility for sponsoring a QSEHRA or implementing a QSEHRA, please contact us.