IRS provides guidance on health reimbursement arrangements for small employers

Tax Hot TopicsThe IRS recently issued Notice 2017-67 to provide guidance on qualified small employer health reimbursement arrangements (QSEHRAs) under Section 9831(d). QSEHRAs enable an eligible employer to reimburse employees for medical expenses, such as health insurance premiums, as defined under Section 213(d). QSEHRAs are funded solely by employers; employees cannot make contributions to a QSEHRA. Payments from a QSEHRA to an employee are not includible in the employee’s income as long as the employee has obtained health insurance. An employer can establish a QSEHRA for any tax years beginning after Dec. 31, 2016. The guidance within Notice 2017-67 is effective for QSEHRA plan years beginning on or after Nov. 20, 2017.

Health reimbursement arrangements maintained by an employer that does not also maintain a group health plan for its employees generally violate certain requirements of the Affordable Care Act (ACA), resulting in a penalty of up to $36,500 per year per employee. The QSEHRA legislation came about to provide relief from these penalties, but as discussed below, the relief is only for small employers. It should be noted, however, that under Notice 2015-17, health reimbursement arrangements maintained by an S corporation for its 2% shareholder-employees are not subject to the ACA penalties until the IRS issues further guidance.  

To be eligible to provide a QSEHRA, an employer must have less than 50 full-time plus full-time-equivalent employees. A full-time employee is defined as an employee who works on average 30 or more hours per week.

An employer who maintains a QSEHRA is not permitted to offer health insurance to its employees. Thus, employees must obtain the health insurance through another source, such as a health insurance exchange.

An employer who provides QSEHRAs must provide them to all employees, with a few exceptions. In addition, QSEHRAs must be provided to all eligible employees under the same terms, which prohibits the employer from providing different benefits to its employees. The maximum permitted benefit an employer may provide to each employee for 2018 is $5,050 for self-only coverage and $10,250 for family coverage.  

Employers are required to provide written notice of QSEHRA coverage, as described in detail in Notice 2017-67, to eligible employees at least 90 days before the beginning of each plan year. Under a special transition rule, employers providing QSEHRAs in 2017 and 2018 must furnish the initial written notice to eligible employees by the later of Feb. 19, 2018, or 90 days before the first day of the plan year of the QSEHRA.

Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Partner, Washington National Tax Office
T +1 202 521 1526

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