updated on Feb. 28, 2017
President Barack Obama on Dec. 13 signed into law the 21st Century Cures Act, which will let small businesses use health reimbursement arrangements (HRAs) to fund employees who purchase individual health plans on the open market.
The bipartisan bill, which Congress passed Dec. 7, focuses primarily on speeding up drug approvals and making innovative treatments more accessible. But it also includes provisions that affect employer-provided health benefits, specifically using HRAs to pay for nongroup plan premiums and ensuring that a health plan's mental health care benefits are equivalent to its physical health care benefits.
HRA Roadblock Removed
The legislation allows small employers with fewer than 50 full-time employees or equivalents that don't sponsor a group health plan to fund employee HRAs to pay for qualified out-of-pocket medical expenses and for nongroup plan health insurance premiums, including for plans purchased on public health care exchanges under the Affordable Care Act (ACA).
Federal agencies' rules, in particular IRS Notice 2013-54 and DOL Technical Release 2013-03, have frustrated many small employers by preventing them from using so-called "stand-alone HRAs" to reimburse employees who buy nongroup health insurance coverage.
"Many employers were upset when the Obama administration shut down the ability for employers to just provide money on a pretax basis for employees to purchase their own health insurance on the open market—a trend that many saw as the wave of the future," said Brian Pinheiro, chair of the employee benefits group at law firm Ballard Spahr in Philadelphia.
The 21st Century Cures Act, which incorporates key elements of the proposed Small Business Healthcare Relief Act, creates a new type of HRA—the qualified small employer health reimbursement arrangement (QSEHRA). The legislation specifies that:
- The maximum reimbursement for health expenses that small employers can provide through employee QSEHRAs is $4,950 for single coverage and $10,000 for family coverage, to be adjusted annually for inflation.
- Small employers that choose to provide QSEHRAs must offer them to all full-time employees except those who have not yet completed 90 days of service, are under 25 years of age, or who are covered by a collective bargaining agreement for accident and health benefits. Part-time and seasonal workers may also be excluded.
- Generally, an employer must make the same QSEHRA contributions for all eligible employees. However, amounts may vary based on the price of an insurance policy in the relevant individual health insurance market, which in turn can be based on the age of the employee and eligible family members, or the number of family members covered.
A New Option
While the act takes effect for plan years beginning after Dec. 31, 2016, "this comes a little late in the game for employers that have already made plans for 2017, but it is an option many employers may want to consider" for subsequent years, said Joseph Lazzarotti, a principal in the Morristown, N.J. office of Jackson Lewis PC., in an online post.
"For eligible small employers, this new law is welcomed and overturns guidance previously issued by the Internal Revenue Service and the Department of Labor that stated that HRA arrangements violated the ACA insurance market reforms, subjecting small employers to a penalty for providing such arrangements," said Chatrane Birbal, the Society for Human Resource Management's senior advisor for government relations. "This change provides small employers greater flexibility in terms of benefit offerings and allows eligible employers to use HRAs to help employees purchase an affordable health insurance plan that fits their individual budget and health care needs."
"This legislation is a huge achievement for small businesses who are looking for more affordable ways to support coverage for their employees," said Sally Poblete, CEO of Wellthie, a health care technology company based in New York City. "This is especially important for the 40 million Americans who work in small businesses, 22 million of which don't receive employer-sponsored coverage. It gives small business more flexibility to choose between the group market or the individual market, both in a tax-advantaged way."
But a cautious note was sounded by Timothy Jost, a professor at the Washington and Lee University School of Law in Lexington, Va. "Employer organizations have been lobbying for this legislation for some time," he noted. "Concerns have been expressed regarding it, however. Over half of employers with fewer than 50 employees currently offer health coverage, and fewer small employers might offer coverage, or small employers might offer less-generous coverage, once HRAs can be offered to pay for individual market coverage instead."
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"Like the HRA itself, the new reform is not perfect," said John R. Graham, a senior fellow at the Dallas-based National Center for Policy Analysis. "For employees who are eligible for tax credits in Obamacare's exchanges, there is a claw-back of those tax credits if their employers fund HRAs for them. It is hard to imagine a small business wanting to substitute its own money for federal taxpayers' in the exchanges."
Graham expects only higher-income earning workers (who are ineligible for tax credits in the ACA's exchanges) to take advantage of the new reform.
"Notice of QSEHRA availability must be provided to the employee at least 90 days in advance of the start of the year, or the start of the new employee's eligibility," noted Paul Edwards, CEO of CEDR HR Solutions in Tucson, Ariz. "Because issuing a notice 90 days in advance of the 2017 calendar year is not possible based on the effective date of the law, employers will be in compliance as long as they issue a 2017 notice by March 13, 2017 (within 90 days of the law being signed)."
There are three main rules to follow when setting a contribution amount, he explained:
- The same terms must be offered to each employee. If you offer to pay 50 percent of premiums for the employee and any dependents, this may result in an employee with a spouse and children receiving more financially than an employee without dependents. This still meets the requirements of the plan because they are receiving a benefit under the same terms—50 percent of the premium is being paid. What you cannot do is pay 100 percent of premiums for managers and 50 percent for the rest of your staff.
- You must adhere to set maximum annual benefit caps. The annual maximums ($4,950 for individuals and $10,000 for employee and family contributions) must be prorated for employees who are not working a full year, meaning if someone starts mid-year you cannot bump up their monthly contribution amounts to allow them to receive the full yearly amount.
- The cost of the QSEHRA benefit must be entirely covered by the employer. The purpose of the QSEHRA is to provide employer-sponsored reimbursement, so you cannot reduce the amount of an employee's pay as a result of them accepting the QSEHRA benefit.
Large Employers Excluded
So-called applicable large employers—those with 50 or more full-time employees or equivalents—still must comply with the ACA mandate to provide affordable group health coverage to full-time workers, which excludes them from using HRAs to fund employees' purchase of nongroup plans. The incoming Trump administration has pledged to "repeal and replace" the ACA, including the employer coverage mandate. However, in the meantime, "the ACA is still the law of the land," said Scott Behrens, a compliance attorney at Lockton Companies, a benefits brokerage and consultancy based in Kansas City, Mo.
Updates: New Guidance on QSEHRAs
A set of frequently asked questions (FAQ) guidance that the DOL issued on Dec. 20, 2016, clarified, in Question #3, that:
- Under the Cures Act, QSEHRAs are statutorily excluded from the group health plan definition and thus are not subject to the ACA's coverage requirements for employer-provided plans (known as the group market reform requirements).
- However, the DOL's prior guidance prohibiting small employers from paying for individual policy health premiums with pretax dollars still applies to HRAs that do not qualify as QSEHRAs and to employer payment plans (EPPs).
- The statutory exclusion of QSEHRAs from the group health plan definition is effective for plan years beginning after Dec. 31, 2016. With respect to employers that used an HRA or EEP to fund individual policy premiums before July 15, 2015, the Cures Act provides that the relief previously offered under IRS Notice 2015-1718 applies.
- An employer that is considered an applicable large employer (i.e., with 50 or more full-time employees or equivalents) is not permitted to offer a QSEHRA.
Time for Employee Notification Extended
Under the 21st Century Cures Act, an employer seeking to establish a QSEHRA must notify its employees concerning (1) the effect that QSEHRA coverage will have on their compliance with the ACA's individual mandate, (2) the conditions under which any employer contributions to the QSEHRA might be taxable to the employees, and (3) the effect that QSEHRA coverage might have on the employees' entitlement to a federal tax credit to purchase coverage through a public exchange. Ordinarily, this notice must be provided at least 90 days before the beginning of the year for which the QSEHRA will be in effect.
"The act included a transition rule, however, under which this notice could be provided as late as 90 days after the enactment date," explained Ken Mason, a partner at law firm Spencer Fane in Overland Park, Kan., in an online post. This would have allowed employers that implemented a QSEHRA for 2017 to provide the notice as late as March 13, 2017. "However, conceding that many employers could find it hard to comply with this notification requirement in the absence of further guidance, IRS Notice 2017-20"—issued at the end of February 2017—"further extends this transition relief," he noted. "The new notification deadline is 90 days after the IRS issues guidance on the notice's content. There is therefore still ample time for a small employer to adopt a QSEHRA for 2017."
IRS Notice 2017-67, issued on Oct. 31, 2017, provides additional guidance on the requirements for providing a QSEHRA, including nearly 80 new Q&As. Among the points clarified in this guidance:
- If an employer endorses a particular individual health insurance policy, form or issuer, "the coverage may constitute a group health plan" subject to ACA coverage and reporting requirements. However, providing employees with information about the ACA marketplace exchange or the ACA's premium tax credit "is not an endorsement of a particular policy, form, or issuer of health insurance."
- For purposes of the QSEHRA requirements, former employees are not treated as employees. As a result, offering a group health plan only to former employees does not cause the employer to fail to be an eligible employer.
- An employer would fail to be an eligible employer if it provides current employees with continued access to amounts that were accumulated in an HRA in prior years or carryover amounts in an flexible spending account (FSA). But an employer can be an eligible employer if it suspends access to amounts accumulated in an HRA in previous years (such that they cannot be used for any purpose) during the period a QSEHRA is provided to its eligible employees.
- An employer can be an eligible employer even if it contributes to an employee's health savings account (HSA), including permitting an employee to make pretax contributions to the HSA, by salary reduction, through a cafeteria plan.
Mental Health Parity
A separate provision of the 21st Century Cures Act requires the Department of Health and Human Services (HHS) to issue guidance to assist health plan compliance with existing mental health parity law. The act also instructs the departments of HHS, Labor and the Treasury to release compliance program guidance providing examples of audit findings with existing mental health parity requirements—intended to remind plan sponsors that they could face enforcement actions and penalties for failing to comply with the mental health parity rules.
When a group health plan is found to have violated the mental health parity rules five times, the secretaries are directed to audit the plan's documents the following year to "help improve compliance' with the rule."
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"Importantly, the act makes clear that the [federal] departments have the authority to audit health plans that have repeated violations of the mental parity laws," explained consultants Allison Klausner and Marjorie Martin, principals with Xerox HR Services in New York City.
"Given the heightened risk of a government audit, employers are encouraged to review vendor agreements, as well as all practices, policies and procedures relating to mental health parity requirements, to assess compliance with the existing law and determine if changes are warranted," they advised. "Likewise, employers that undertake such a review will want to document steps taken."
Qualified Small Employer HRAs Face Steep Compliance Path, E Is for ERISA, February 2017
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