On December 13, 2016, President Obama signed into law the 21^st Century Cures Act (the "Cures Act") which, among other things, permits the establishment of "qualified small employer health reimbursement arrangement" (QSEHRA) for plan years beginning after December 31, 2016. A complete copy of the Act is at this link.

This Alert provides an overview of the basic rules for establishing a QSEHRA and notes that in Notice 2017-20, published on February 27, 2017, the IRS indefinitely extends the time for plan sponsors to provide the required QSEHRA notice to employees (discussed in more detail below).

Cheiron Observation: Although the IRS has indefinitely extended the timeframe for the notice requirement, from a practical standpoint, any employer that adopts a QSEHRA should make a reasonable good faith effort to provide notice to participants containing the information prescribed by the Cures Act.

The Qualified Small Employer HRA

The Cures Act modifies the Internal Revenue Code (IRC), the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act (PHSA) so that a QSEHRA is not considered a group health plan. This means that QSEHRAs will be exempt from the requirements and penalties imposed by the IRC, ERISA, and the PHSA, as amended by the Affordable Care Act (ACA).¹ These requirements and penalties had the practical effect of prohibiting such arrangements before the Cures Act.

The requirements to be a QSEHRA and the additional actions needed are:

• Eligible Employer: A small employer (i.e., an employer with less than 50 full-time employees or full-time equivalent employees, determined on a controlled group basis) is eligible to establish a QSEHRA if it:
• Is not subject to the employer mandate under the ACA (is not an "applicable large employer" under IRC section 4980H), and
• Does not offer a group health plan to any employees.

Cheiron Observation: Since one of the requirements for having a QSEHRA is that the employer cannot offer health coverage, an employee either will have to purchase an individual policy (through private insurance or on the Marketplace) or be covered by the health insurance plan of the employee's spouse or a parent.

• Funding: The QSEHRA must be funded solely by employer contributions. Salary reduction contributions are not permitted.

• Reimbursable Expenses: The QSEHRA can pay and reimburse for medical care expenses, as defined in Code § 213(d) (including premium payments for individual health insurance policies covering the employee or enrolled family members, whether purchased from a broker or through the Marketplace).

• Annual Benefit Cap: The amount of payments and reimbursements from the QSEHRA for a plan year cannot exceed $4,950 for individual coverage of the employee or $10,000 for family coverage, prorated for partial year coverage. These limits will be increased for CPI cost-of-living adjustments.

• Coverage: The QSEHRA generally must be provided on the same terms to all eligible employees of the eligible employer. However, benefits under a QSEHRA are permitted to vary in accordance with variations in the price of an insurance policy in the relevant individual health insurance market based on the age of the eligible employee (or, the ages of the employee's enrolled family members) or the number of enrolled family members. Any such variation must be determined by reference to the same insurance policy with respect to all eligible employees.

• Eligible Employees: Eligible employees, for purposes of the QSEHRA, are all employees of the eligible employer, except that an employer may exclude:
1. Employees who have not completed 90 days of service,
2. Employees who have not attained age 25,
3. Part-time or seasonal employees,
4. Employees not included in the plan who are covered under a collective bargaining agreement (as long as accident and health benefits were the subject of good faith bargaining), and
5. Employees who are nonresident aliens and who receive no U.S. earned income.

• Required Notice: Generally, not later than 90 days before the beginning of the plan year (or, for an employee who is not eligible to participate as of the beginning of the year, the date on which the employee is first eligible), the sponsor of the QSEHRA is required to provide a written notice to each eligible employee that includes the following statements:
1. A statement of the amount of the eligible employee's benefit under the QSEHRA for the plan year,
2. A statement that the eligible employee should provide the amount of such benefit to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit (generally not later than 30 days after the eligible employee receives notice), and
3. A statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to taxation for such month, and reimbursements under the arrangement may be includible in gross income.

• Income Tax Treatment of QSEHRA: As long as the employee enrolls in a health plan (through private insurance, the Marketplace, spouse's or parent's employer) that qualifies as minimum essential coverage (MEC) for the year, the QSEHRA benefit will not count as taxable income. Otherwise, the amount will count as taxable income.

• Required W-2 Reporting: The employer must report on Form W-2 the total amount of the benefit for the year for each employee covered under the QSEHRA, regardless of whether the amount is taxable.

• Coordination with Health Insurance Premium Tax Credit: In general, under the Cures Act, an employee cannot receive a premium tax credit (i.e., a subsidy for coverage through the Marketplace) if the employee is covered under a QSEHRA that provides affordable coverage. A QSEHRA provides affordable coverage if the premium that would be paid by the employee for self-only coverage under the applicable second lowest cost silver plan minus the employee's benefit under the QSEHRA does not exceed 9.5% of the employee's household income. If a QSEHRA does not provide affordable coverage, then the monthly premium tax credit will be reduced dollar-for-dollar by the amount of the monthly QSEHRA benefit.

Cheiron Observation: QSEHRAs should prove beneficial for eligible small employers that either (i) do not currently offer a group health plan, but want to provide funds to help employees purchase their own coverage or (ii) want to discontinue their group health plan and move to a QSEHRA, presumably less burdensome than a group health plan.

Cheiron consultants can assist you with your QSEHRA design and implementation.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

¹ Absent this exception, the HRA would have to meet the ACA requirements for integration with another employer-provided plan or meet the requirements as a stand-alone plan, as set forth in Notice 2013-54 and Notice 2015-17, and Technical Release 2013-03.