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Date: 10/17/2017

Small businesses can now reimburse employee medical expenses

No Affordable Care Act excise tax on certain plans of small employers

TAX ALERT  |  December 14, 2016

On Dec. 13, 2016, President Obama signed into law the 21st Century Cures Act, which exempts certain small employer health reimbursement arrangements from the $100 per day excise tax under the Affordable Care Act (ACA). The Cures Act provides requirements for a new qualified small employer health reimbursement arrangement (QSEHRA) effective in 2017 and welcome transition relief for small employers through 2016.

Background

In 2013, the IRS determined that certain premium reimbursement plans, health reimbursement arrangements (HRAs) and other types of medical expense reimbursement plans offered by employers to help employees pay for health insurance premiums or medical expenses did not comply with the ACA. Large employers had to terminate or modify their arrangements for 2014 to avoid an excise tax of $100 per day per affected individual. Small employers with premium reimbursement plans were given until June 30, 2015, to comply. To avoid the excise tax, most employers terminated their arrangements.

QSEHRA requirements

After Dec. 31, 2016, small employers can once again establish reimbursement arrangements for medical premiums and expenses. These arrangements will not be subject to the $100 per day excise tax as long as they meet all of the following QSEHRA requirements.

  • The arrangement is established by a small employer that had, on average, less than 50 full-time and full-time equivalent employees in the prior calendar year. For purposes of determining the 50-employee threshold, aggregations rules apply to combine companies that have common owners or services.
  • The employer does not offer a group health plan to any of its employees.
  • All employees must be eligible to participate except that the employer can exclude employees with less than 90 days of service, certain part-time and seasonal employees, union employees, employees under age 25 and non-resident aliens.
  • The arrangement is funded solely by the employer with no employee contributions.
  • The employer offers the arrangement on the same terms to all eligible employees. The QSEHRA can meet this requirement even if an employer’s reimbursement limit varies based on the cost of health insurance. Thus, an employer can provide a greater reimbursement to an employee who is older or is covering multiple family members.  
  • The QSEHRA reimburses only qualified medical expenses such as out-of-pocket costs for medical care and employee premiums for individual health insurance policies. It appears that Medicare premiums and TRICARE expenses would also be reimbursable. Employees will need to provide documentation for all expenses.
  • The annual reimbursement is limited to $4,950 for employee-only coverage and $10,000 for family coverage. These maximum limits are prorated for employees participating in the QSEHRA for less than 12 months of the calendar year and will be adjusted for inflation annually.
  • The employer provides an annual written notice (90 days in advance of the plan year) to all eligible employees about the QSEHRA including the dollar amount of reimbursements available. Failure to provide the notice can trigger a penalty on the employer of $50 per employee, up to $2,500 per year. For 2017 only, employers have up to 90 days after the enactment of the new law to deliver the notice.
  • The employer reports the QSEHRA reimbursement on the employee’s Form W-2 either as a taxable or nontaxable item. The reimbursement will be taxable if the employee does not have minimum essential health coverage, such as a major medical health insurance policy.