A new law signed by President Obama restores the ability of small employers to reimburse employees for their individual health insurance premiums beginning January 1, 2017. The 21st Century Cures Act exempts qualified small employer health reimbursement arrangements from many of the Affordable Care Act’s (ACA) requirements. It also provides funding for medical research and additional provisions designed to improve compliance with mental health parity requirements.
Since late 2013, IRS Notice 2013-54 and other guidance prohibited most employers from reimbursing individual health insurance premiums for employees. These arrangements violated many of the ACA’s requirements. Failure to comply could result in a hefty self-reported excise tax of up to $36,500 per person per year.
This new law offers small employers the opportunity to reevaluate this benefits approach. However, it does not give employers free reign to reimburse all manner of individual health insurance premiums. Numerous limitations appear in the law that did not apply prior to 2013:
- Only small employers that are not considered Applicable Large Employers under Code 4980H(c)(2) are permitted to offer a QSEHRA.
- The small employer must not offer a group health plan to any employee.
- Reimbursements are limited to $4,950 for individuals and $10,000 for families annually.
- The limits apply on a pro rata basis for coverage maintained for less than 12 months.
- The QSEHRA must be provided on the same terms to all employees. Generally, variations due to age and number of eligible family members are the only variations permitted.
- Reimbursements are excluded from taxable income if the individual has minimum essential coverage and provides proof to the employer.
- Form W-2 reporting applies for the amounts reimbursed.
- The small employer must provide a new notice no later than 90 days before the beginning of the year. This notice must meet certain content requirements. Penalties may apply if the notice is not provided.
This provision comes at a critical time for small employers, although it may be too late for some to change course for January. We recommend that small employers work with an experienced benefits consultant to structure their QSEHRA. Any efforts by the new President and Congress to repeal and replace the Affordable Care Act may impact these new rules as well. Stay tuned to the Healthcare Reform Digest for more information.